The U.S. airline industry earned a profit of $390 million in
2011, which is lower than $2 billion projected by the International
Air Transport Association (IATA). The 2011 profit also plunged 86%
from $2.7 billion earned in 2010. The industry has been struggling
with either mounting costs, fuel in particular, or economic
uncertainties. The trend, it appears, will continue this year.
Fuel price volatility is the major threat to the airline
industry and represents about 35% of total expenses, up from 30% in
2010. North American airlines yielded 0.3% of the net margin, down
from 2.2% in 2011. Revenue climbed 12.6% year over year with total
expenses rising 15.5% primarily due to a 36.1% rise in fuel
costs.
Airlines are also losing money due to poor customer service,
which is considered as a key growth metric. Customer service
metrics are based on a number of operational measures such as
baggage handling, on-time arrivals, long and excessive delays,
bumping of passengers, flight cancellations and complaints filed
with the Department of Transportation (DOT).
U.S. airlines have outperformed in 2011 in three major metrics -
baggage handling, on-time arrivals and bumping of passengers -
relative to other regional air carriers. Additionally, customer
complaints have dropped to 1.18 per 100,000 passengers from 1.20 in
2010.
2011 marked the second consecutive year of airlines making the
profit after incurring cumulative losses of more than $50 billion
during the past 10 years. The carriers are taking several steps to
regain their lost profitability. Fare hikes and fuel hedging are
the most effective tools to abate the negative impact from fuel
prices.
The companies' ability to pass along the increased costs of fuel
to their customers is limited by the competitive nature of the
airline industry. However, the carriers have been successful till
now in passing along the higher prices to customers in the form of
fare hikes. Hedging strategies provide a cushion to the rising fuel
prices and is being used extensively by most of the air
carriers.
Moreover, the carriers are cutting capacities and adding new
features to their services as well as introducing new products,
which are enhancing their value and profitability. These measures
will fuel revenue growth and reduce non-fuel costs.
Air carriers are further focusing on fleet rightsizing. Though
initially expensive, this seems the correct strategy to lower
non-fuel costs. Air carriers are replacing their older fleet, which
are no longer feasible in a fuel-expensive environment, with a new
fuel-efficient aircraft.
Going forward, we will be carefully watching whether the
cost-cutting measures and several initiatives help airlines to
overcome the rising fuel prices. Additionally, we believe North
American airlines like
United Continental Holdings Inc
. (
UAL
),
Delta Air Lines
(
DAL
),
Southwest Airlines Co.
(
LUV
),
JetBlue Airways Corporation
(
JBLU
) and
US Airways Group Inc.
(
LCC
) that were untouched by the ongoing Euro-crisis will benefit the
most in 2012.
Thus, we are maintaining our long-term Neutral recommendation on
Delta, United Continental, Southwest and JetBlue. For the short
term (1-3 months), JetBlue retains the Zacks # 2 (Buy) Rank while
the rest hold the Zacks # 3 (Hold) Rank.
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
JETBLUE AIRWAYS (
JBLU
): Free Stock Analysis Report
US AIRWAYS GRP (
LCC
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
UNITED CONT HLD (
UAL
): Free Stock Analysis Report
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