Airline Economic Analysis 2014

US airline performance was strong enough in the past year to raise the question: Is the airline business becoming a “regular” business, with sustainable profits?

Both network and value carriers achieved their best margin performance of the past decade – the result of healthy demand, stable fuel prices, capacity restraint, and an ample supply of slim-line seats, according to Oliver Wyman’s Airline Economic Analysis 2014. Strong revenue growth was accompanied by flat costs, as increases in labor were largely offset by lower, and relatively stable, fuel costs.

The increase in domestic revenue per available seat mile, or RASM, during the year ending June 2014 was unusually strong, outpacing the increase in international RASM and halting the trend of network carriers relying largely on their international operations for revenue growth. Although value carriers continued to earn higher margins on domestic service, network carriers made substantial progress in turning their historically low-margin or loss-making domestic operations into a profitable business.

Oliver Wyman releases this year’s reference analysis to coincide with the Raymond James Transportation Conference on November 6, 2014. The report includes extensive aviation data analysis, including more than 55 charts based on data.

Other analyses detailed in the report include:

  • Cost per available seat mile (CASM), revenue per available seat mile (RASM), and margin comparisons across carrier groups and individual carriers
  • Fluctuation of fuel price on CASM
  • Comparisons of direct CASMs for narrow-body aircraft operated by different carriers
  • Seat density choice and implications on break-even fares and CASM profiles
  • Revenue growth drivers including capacity changes, load factors, yields, cargo, and ancillary revenues
  • Regional variations in demand and capacity growth
  • Global traffic flows and changes in fleet deployment
  • Value carrier capacity changes around the world
  • RASK (revenue per available seat kilometer) and CASK (cost per available seat kilometer) for international carriers

Airline Economic Analysis 2014

Bob Hazel Answers 4 Questions
  • 1Can US airlines become a “regular” business, with sustainable profits?

    Over the past decade, every major airline cost component, except fuel, has been restructured, renegotiated, or reduced through the use of technology. Equally important, the US airline industry has evolved into a smaller number of larger carriers. Although the airline business will always be subject to cyclical demand, fuel spikes, and other risks, it has certainly moved in the right direction.

  • 2Is seat density the answer?

    Seat density and aircraft size are important tools in minimizing unit costs, and airlines continually study both subjects. For example, the lower unit cost of larger aircraft must be balanced against the need for frequent service in business markets. Over the past five years, the clear trend for network and value carriers around the world has been to increase seat density and shift towards larger narrow- body aircraft.

  • 3To what extent is ancillary revenue keeping the business profitable?

    If all ancillary revenue disappeared, and was not replaced with higher fares, the industry would go from profit to loss. However, it’s more realistic to think of ancillary revenue as a form of product unbundling that also happens to produce higher overall revenue because passengers are less price-sensitive when it comes to ancillary fees.

  • 4How high can load factors get?

    Over the past year, the average domestic load factor was 86% for network carriers and 83% for value carriers. Ten years ago, few predicted load factors would reach these levels. Although it is possible to further increase load factors, doing so involves revenue and customer service trade-offs, especially for network carriers operating in business markets as they “spill” increasing amounts of traffic. Leisure-oriented carriers are likely to have the highest load factors.

Industry analysts have pointed to sub-GDP domestic capacity growth as a primary driver of airline yield increases. This theory will continue to be tested over the long term.
Bob Hazel, Partner, Oliver Wyman