IATA DG Tony Tyler spoke in front of an audience of airline chiefs and regulators in Singapore, saying that airline industry profitability remained fragile despite $36bn in industry profits forecast for 2016. See more on this speech here.
So what does the data show? Has the higher US dollar hurt, and have fuel hedges crimped profits? Intriguingly, as the story points out, “The majority of this year’s industry profits, or $19.2bn, will be generated in North America, IATA says.” Now that’s a useful data point.
In December CNN published a story on US airline industry profits. This story is full of very big numbers – in the first three quarters of 2015, airline profits were up 75%, fuel costs dropped 38% and load factors were at 83%. The decline of fuel prices saved the industry $4.3bn and labor costs rose by $1.4bn in the third quarter alone. While these numbers don’t scream profiteering, they certainly demonstrate an industry in rude health.
One way to better get a handle on the profiteering charge is to understand what happened to fuel surcharges. The Wall Street Journal had a story about this early in 2015. US consumers have become familiar with airline fee shenanigans. Now we have ‘carrier-imposed charges’. Here is a link without a paywall and providing a lot more detail. The problem persists even outside the US. Here’s a Bloomberg story and video. Note how the airline official does not really answer the simple question.
If the price of jet fuel has fallen by 70% in the past two years but the average cost of a transatlantic airline ticket has been cut by 2% over the same period, it sure does not look right and does not pass the smell test. This is why the airline industry is being accused of “profiteering“.
If the airline industry wants to claw back some credibility, they should learn from what FedEx has done. FedEx and UPS run businesses that operate like airlines. FedEx’s website shows its ground fuel surcharge is dropping from 4% to 3.75%, effective February 1. The UPS website shows its ground surcharge for December 7, 2015 to January 31, 2016, at 5.25% and this will be reduced to 5% for the period February 1 to March 6.
Judge Louis Brandeis wrote in Other People’s Money and How the Bankers Use It (1914): “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” (link) The world can use some sunlight on airline fees. Indeed, deciphering airline prices is something of a science.
Here is a list Delta provides for the fees it charges. Take a look at a typical US international airfare receipt.
Two items are highlighted. The September 11 fee is a security fee for the airport security theater travelers have to endure. Not much one can do about that, other than smirk at the value. But the “Carrier-imposed surcharge” is something that deserves sunlight – a lot of sunlight. With every other item broken out by the airline to show where the fare is being pushed up, why not break out the carrier imposed fee as well?
To quote another US jurist: In 1964, Justice Potter Stewart tried to explain “hard-core” pornography, by saying, “I shall not today attempt further to define the kinds of material I understand to be embraced . . . [b]ut I know it when I see it . . . “. When it comes to airlines “profiteering”, it may be tough to define, but we too know it when we see it.
Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.
