Airlines Return to Profitability Despite High Fuel Prices

U.S. legacy carriers have begun to experience a financial turnaround this year despite record-high fuel prices, but they have done so largely on the backs of their customers. (To compare the industry’s 2006 performance with 2005’s, see “How to Save an Airline” and “Another Turbulent Year” at www.cio.com/021506.)

“The airline industry is coming back,” says John Kasarda, director of The Frank Hawkins Kenan Institute of Private Enterprise at the University of North Carolina at Chapel Hill. “Their load factors [the ratio of paid passenger seats to total seating capacity] are up considerably due to an increase in passengers and cutbacks in capacity. And that’s enabled them to raise their prices.”

Airline fares are back to pre-9/11 levels, rising 10.3 percent in the first quarter of 2006 from the first quarter of 2005, according to the DoT’s Bureau of Transportation Statistics’ “Air Travel Price Index.” It was the biggest year-to-year jump since the DoT launched the index in 1995. The airlines also reported their largest domestic profit margin (7.2 percent) since 2000 in the second quarter of this year, according to the bureau. Analysts expect the U.S. airline industry to return to profitability this year, with the exception of Delta and Northwest Airlines, which are still under bankruptcy protection.

But even with this windfall, “the legacy airlines have failed to invest in their product,” says Forrester VP of Travel Research Henry Harteveldt.

“Today, you’ll pay $1,000 to fly a [traditional] airline between California and Chicago,” Harteveldt points out. But “the airlines haven’t redecorated their planes or put in new seats since Clinton was in office. They’ve taken away amenities. You have to pay $5 to get a crappy sandwich. Now that passengers aren’t paying those $79 each way fares anymore, their patience will wear out.”

And, perhaps, Virgin America will step in.