There might be a few clouds on the global economic horizon, but for the moment airlines in the US are feeling pretty damn fine.
After a decade of losses, consolidation and low investment, the corner has now been turned – there are fewer US carriers but they are generally very profitable, and with a product that once again rivals the best in the world. Airlines may have adopted a buy-what-you-want approach on domestic ticketing as a source of ancillary revenue but on international services the free wine and beverages are back and the flat bed in business class is almost guaranteed.
In 2005, US airlines lost $10.8 billion on average oil prices of $56 a barrel. Ten years on, with average fuel rates not dissimilar, the four biggest carriers alone – American Airlines, Delta, United and Southwest – made almost $19 billion in 2015.
“The figures speak for themselves,” said Bob Schumacher, United Airlines’ UK and Ireland managing director of sales. “Yes, the volume of profitability has come from oil but it has also come from consolidation and efficiencies. It’s been a dramatic change – US airlines are probably the most successful globally.”
Consolidation in the past decade has seen United/Continental and Delta/ Northwest Airlines become one; plus, as recently as December, American Airlines merged with US Airways. Consumers may have less choice but at least airlines are making money again. The industry also seems to be reining in capacity, with average fares holding up. “The business medicine, if you like, has been taken. There seems to be more discipline than in most markets,” Schumacher believes.
Lest passengers start to think all the cash has been stashed away, airlines will point to investments in new aircraft and bringing premium cabins up to global standard. In Delta’s case, it has also reduced debt from $17 billion at the time of the Northwest merger to $6 billion now – meaning it is less vulnerable when the next downturn comes.
“We know the industry is cyclical, we know fuel will go back up: the question is can we be sustainable in the down cycle? We have a lot of things going for us,” said Nat Pieper, Delta’s EMEA SVP. He adds that Delta’s debt target is $5 billion, a level he says at which it is better to start reinvesting again.
All the big US carriers, even Southwest and JetBlue, have been looking internationally for their expansion, where yields are generally higher. Delta’s focus in 2016 is on Seattle and Los Angeles, to give it more of a presence on Pacific routes. The past few years have seen it build domestic feed into Seattle to make long-haul routes viable.
“We’re growing LA much more, too,” adds Pieper. “If you’re going to be number one carrier of choice in the US, LA and New York are top of the list.” One example is Los Angeles-Shanghai, launched last July.
Delta is also building traffic at Salt Lake City, its smallest hub, as a stop-off in place of Seattle for passengers arriving from Europe. This, Pieper says, will push more higher-yield passengers to Seattle and avoid connections where passengers retrace steps.
United is also keen on transpacific, and will launch three routes from San Francisco, to Xi’an in May and Auckland and Hangzhou in July. China is a focus for United, as Hangzhou will be its 14th route there.
American Airlines is also focusing on the west coast, adding 12 domestic routes from Los Angeles, including five a day to Seattle, plus Auckland this summer. This follows Los Angeles-Tokyo Haneda earlier this year and Los Angeles-Sydney in December, its first service to Australia since 1992. Four new routes to Cancun also began in March.
There are two reasons for this west coast build-up: more fuel-efficient aircraft (Boeing 787s) and joint ventures. United’s Auckland route is a revenue-sharing JV with Air New Zealand, Delta’s is with Virgin Australia and American Airlines’ alliance with Qantas was approved in February for five years with Australian competition authorities saying the US carrier was “unlikely” to have introduced these routes without a JV. Joint ventures have been a big boost to bottom lines, with the Delta/Air France/KLM partnership generating an operating margin in excess of 20%.
Transatlantic joint ventures in general are much further advanced, but this year Delta will launch Detroit-Munich, Minneapolis/St Paul-Rome and Paris-Raleigh/Durham with its partners’ marketing support.
Two things may have a bearing on what US carriers do on transatlantic routes in the future. Firstly, the ongoing battle with the Gulf airlines, which are launching a swathe of direct routes from the Middle East to key US hubs. In doing so, they are taking some of the connecting traffic that flies with US carriers to Europe and connects on their alliance partners to the Middle East, and particularly Asia. Complaints to Congress are being mulled over.
Meanwhile, there is also the rise of budget long-haul carriers Norwegian and Wowair over the Atlantic. Norwegian has already made its mark at Gatwick and in Scandinavia with its US services, plus it launches Paris-US flights this summer. Legacy carriers dismiss Norwegian as a point-to-point operator but, with an order book of 30 787s, its long-haul fleet will be the same size as Virgin Atlantic by 2020.
Given this, we may see some reaction from legacy airlines on transatlantic routes but it is likely that the focus will shift to China and South America, as the combination of low oil prices and fleet renewals prompt carriers to be bold in their choice of new routes in the next five years or so. All the big three US carriers have used the low interest rate environment to purchase new 787-9s and Airbus A350s. Even Delta, which has so far bought the bulk of its additional aircraft from the used market, has them on order.
Despite their bullishness, the big three do not have it all their own way. Southwest remains a major competitor, as does its younger cousin, JetBlue, with a swathe of budget brands expanding domestically.
Southwest began flying internationally only in mid-2014 following its merger with AirTran and in April launches its 13th overseas destination, from Los Angeles to Costa Rica’s Liberia. Southwest’s ambitions for 2016 include a wish to operate from Long Beach Airport, adding to its portfolio of five Los Angeles area airports, where it claims to offer more daily flights than any other carrier. Southwest’s other latest focus is Houston’s Hobby Airport, where the lifting of restrictions on international routes after 46 years saw the opening of a $156m international concourse last October.
Dallas Love Field benefited from a similar lifting of restrictions in late 2014 and Southwest went from 16 destinations to 50 during 2015. A spokesman said further expansion there was unlikely, as Southwest already uses 18 of its 20 gates, each with 10 flights a day. This year, Southwest expects overall capacity growth of 5-6%.
JetBlue, which is a hybrid model, splits most of its capacity equally across Florida, transcontinental and Caribbean/Latin America with focus airports at New York, Boston, Fort Lauderdale, Orlando, Long Beach and San Juan.
In 2016, it plans to continue growth from Fort Lauderdale’s new runway. Here, JetBlue offers 46 destinations, including 19 to the Caribbean and Latin America. Among them are Barbados, Puerto Rico and Ecuador, its 22nd country, plus it flies transcontinental to San Diego. This will build to 140 flights a day this winter, which JetBlue says is 75% growth.
At Fort Lauderdale, it is impinging on Spirit Airlines’ home base. Spirit, an ultra-low-cost airline, is also investing, with orders that will grow its fleet from the current 79 aircraft to 145 by 2021. Another major low-cost carrier, Denver’s Frontier Airlines, is being aggressive in 2016 with 56 new routes spread throughout the US from Seattle to Florida.
Meanwhile, Las Vegas’s Allegiant Air, which has grown using older McDonnell Douglas’ series aircraft, plans 19 new routes in 2016, including a debut at Baltimore/Washington, where it will offer six routes by June. Cincinnati, New Orleans and San Diego will also see new services.
These additions follow 22 new routes in 2015, mostly between smaller city pairs. All major US carriers, low-cost and legacy, are eyeing the 2016 prize: Cuba. American Airlines is leading the charge, with applications for 142 flights a week, including 10 a day from its Miami hub to Havana, while United plans 11 a week to the Cuban capital, including a daily from Newark. JetBlue has asked for 15 a day, seven from Fort Lauderdale. Florida is also the focus of Southwest’s application. It wishes to serve Havana from Fort Lauderdale, Tampa and Orlando, plus Varadero and Santa Clara from Fort Lauderdale.
Expansion like this comes on the back of the fall in oil prices and a lower cost base that all carriers are enjoying and barring no major upsets, things seem set fair for 2016.