Fat Years for US Airlines Come to an End New Labor Contracts, Fleet Upgrades Crimping Ability to Generate Profits

By Bloomberg, Justin Bachman | The Spokesman-Review (Spokane, WA), October 31, 2017 | Go to article overview

Fat Years for US Airlines Come to an End New Labor Contracts, Fleet Upgrades Crimping Ability to Generate Profits


Bloomberg, Justin Bachman, The Spokesman-Review (Spokane, WA)


America's passenger carriers have discovered that it's getting more expensive to run an airline these days.

While summertime profits were fine, and travel demand remains robust, a number of airlines are facing higher bills from a variety of factors: labor contracts, significant airport renovation projects, technology spending and fleet upgrades. The increase in expenses is creeping into 2018 and threatens to spoil higher revenues just as executives are crowing about how they will keep fares up for the holidays.

Note the absence of the usual culprit in these matters: fuel. While it's pricier today relative to 2016, jet fuel expenses still represent roughly the same burden for all carriers (though spot prices have gained 24 percent over the past year). That's one reason investors typically exclude fuel from the industry's standard spending measure, cost per available seat mile.

The real issue causing investor angst is how much non-fuel costs will increase in 2018. As of April, the industry's four largest players were all operating under new contracts with their pilots and flight attendants.

The higher expenses from these pacts had been viewed as largely a cost event for 2017, said Joseph DeNardi, an equity analyst with Stifel & Co. "I think the expectation was that once you got through this year, where costs are elevated, the trend should improve next year," he said. But that hasn't been the case, a fact DeNardi said has been a "disappointment" for Wall Street.

Higher costs hinder airlines' ability to boost profits, even if fuel costs were to remain stable and passenger revenues rebound from higher ticket prices. Investors knocked 12 percent off United Continental Holdings shares on Oct. 19, in part because executives declined to offer any insight about the company's cost or growth outlook for next year.

"We are ... deep in the middle of this stuff," United Chief ExecutiveOfficer Oscar Munoz said on his now famously testy call with analysts, explaining that his team was taking "a very different approach" to its planning for 2018 and required more patience from investors.

A similar scenario, with accompanying stock declines, played out with American, Alaska Air Group Inc., JetBlue Airways Corp. and Southwest Airlines Co. - all of which are facing cost pressures in the coming year. The five carriers are closely managing their capacity growth in 2018 and expressed optimism that a spate of fare skirmishes is drawing to a close. …

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