3 Reasons Airlines are Facing 'Revenue Turbulence'
Aug 12, 2016 / By Vanessa Horwell
The airline industry will always be a mainstay of the global economy, but it’s fallen on tougher times than expected 2016. Many believed that falling fuel prices and rising economic tides would make this a banner year for the airline sector, but that’s hardly been the case: Shares of all major U.S. airlines were in the red as of the time this post was written.
Airlines’ income is naturally prone to ups and downs; seasonality, corporate travel budgets, and a million other factors inherently impact airlines margins all year long. But for reasons outlined below, among others, the present moment is an especially turbulent time for even most storied and successful international carriers.
Bad Fuel Bets Mean Too Much of Some
Seeking to capitalize on the low cost of fuel, many airlines overdid it on fuel hedging – the practice, common among airlines, of attempting to ‘lock in’ lower prices by entering into contracts to pay a fixed cost for oil in order to mitigate their exposure to shifting prices. According to CNN Money, Delta lost $450 million because fuel prices didn't jump as high as the airline thought they would. That’s not even as bad as it could have been: In 2015, the airline lost $2.3 billion according to company filings.
Delta’s hardly alone in its hedging issues: United Continental Holdings Inc. lost $604 million last year, and Southwest Airlines said in March 2016 that it could lose more than $1 billion on hedges in the coming years. Delta, for one, has said it plans to abandon the practice amid continuing losses over an eight-year span – but it remains to be seen if they will follow through on that claim (or if any other airlines will follow suit).
Excess Seats Mean Not Enough of Another
While travelers may be enjoying a little more elbow room these days, airlines aren’t celebrating the extra space. For months, if not years, industry analysts have noted that airlines are flying too many planes and offering too many seats for the current demand among travelers – and it’s definitely catching up with them. According to Investopedia, American Airlines recently reported a 44 percent drop in net income due to a 6.3 percent drop in revenue per ASM (available seat miles) and United projects a coming decline of 5.5 to 7.5 percent in the next quarter.
In an earnings call, United's Chief Revenue Officer Jim Compton said, “Capacity is growing faster than demand across the industry, and that’s putting pressure on yields." It’s also leading to a changing relationship between airlines and their income: Today’s top airlines are now earning more than a third of their revenue from ancillary services, not seat sales.
Global Uncertainty Means ‘How Much’ is Hard to Know
Especially for European carriers, the impact of the Brexit is being felt across the airline industry as consumers feel a drop in confidence: EasyJet’s CEO told the BBC that the U.K.'s decision to leave the European Union had already cost the airline £40 million ($52 million). Then there’s the Zika virus, and resulting Miami travel warning, which is dinging airlines’ performance amid a usually ultra-busy summer travel season.
While the Zika virus may be a temporary problem mostly impacting the Americas, Brexit’s impact will reverberate globally for years to come. Stateside, the U.S. election is certainly making long-term planning harder for airlines: In the event of a Trump presidency, airlines could face the consequences of international travel restrictions and a very different (read: negative) business landscape. But if that were to happen, ‘revenue turbulence’ would not be exclusive to the airline sector.
I’m hedging my bets, in any case.
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