Airline Economic Analysis 2015-2016

Aviation Aerospace & Defense

Airline Economic Analysis 2015-2016

Thanks to cost reductions led by the decline of energy prices, industry consolidation, and capacity discipline, the US airline industry is enjoying operating margins above 15 percent. That’s a strong margin for any industry, but a particularly big deal for airlines that have struggled in years past to turn a profit at all.

Even more impressive, margins remained strong despite recent revenue challenges. Yields have begun to decline after peaking in 2014, that is, airlines are bringing in less money on each revenue passenger mile. Unsurprisingly, the recent yield declines appear to coincide with creeping capacity growth for US carriers system wide, but particularly in the domestic market.

The revenue decline leaves observers questioning whether airline profits can outlast the fuel cycle.

The report includes:

  • Profit margin data
  • Break-even load factors
  • US carrier capacity
  • Passenger yield
  • Ancillary revenue
  • Revenue per available seat mile (RASM)
  • Cost per available seat mile (CASM)
  • Narrow-body and Wide-body data
  • Jet fuel costs and labor costs
  • Capacity analysis
  • Stage-length adjusted revenue per available seat kilometer (RASK) and cost per available seat kilometer (CASK) for international carriers
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Since January 2000, US airlines have paid as little as $0.60 per gallon of fuel and as much as $3.83 per gallon, a 538% difference. To help illustrate how fuel price fluctuations impact an airline’s operating profit, a fuel cost variance analysis is used. Although the impact is theoretical as market pricing, demand and other costs are also influenced by these same changes, the analysis does highlight the magnitude of impact from fuel price volatility on profitability. This fuel variance analysis assumes that pricing, passenger demand and all non-fuel costs are unchanged when user-selected fuel prices are applied.

Notes: Based on DOT Form 41 P1.2 and P5.2 data for the second quarter of each year. Financial figures in US dollars. Fuel cost per passenger and gallons per passenger are per segment.


Partner, Oliver Wyman

4 Questions

For Tom Stalnaker

Tom Stalnaker
  • 1

    Are US airline costs declining because of lower fuel prices?

    Yes, lower fuel prices are the main reason, but other costs have also dropped, such as aircraft ownership and maintenance costs – just not as much. Overall unit costs are dropping faster than unit revenue, allowing airlines to maintain margins.

  • 1

    What are airlines doing better?

    Airlines have become better at matching capacity to consumer demand during the past decade, maintaining high load factors in both peak and off-peak times. Record load factors in the past two years are largely the result of airlines stimulating off-peak demand and reducing unnecessary off peak capacity.

  • 1

    Are bag fees and other revenue streams still important for airlines?

    Yes, ancillary revenue continues to rise. The largest category is miscellaneous, which includes such things as priority boarding fees and in-flight entertainment sales. Baggage fees are a close second.

  • 1

    What if fuel prices go back up?

    That’s the billion dollar question. Will the profits outlast the fuel cycle? Or are these fuel prices masking recent weaknesses that will be exposed at higher fuel prices? Airline executives are asking themselves these questions now.