p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px img alt src http www sutherlandinsights com documents 10838 3975379 airline market reboot banner 650x259 jpg 50754ac2 d2e8 46e6 b9cf b92b5c75e90c t 1492687152239 style width 650px height 259px p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px The US airline industry seems to have emerged successfully from the era of persistent annual losses and airline bankruptcies that had crippled the market since the early 2000s The industry today has achieved historically high operating margins of 15 compared to 9 in 2011 This in itself is a positive change for most industries particularly airlines which has for years struggled to turn profitable let alone recording double digit growth rates Amid this phenomenal upsurge a question naturally arises are airlines celebrating a short lived revelry or is this the real deal It would be interesting to take a closer look at some of the key industry fundamentals market scenarios and business initiatives that might help dispel the talks of this recovery being a possible aberration p p class txti2 style text align justify color rgb 47 88 151 line height 20px font size 14px font weight normal margin top 5px strong Structural changes and operational discipline deepen core strengths strong p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px strong Greater industry concentration means better market control for carriers strong One explanation for this improved performance is the benefits accrued by airlines from consolidations which have accelerated since 2011 also lower competitive intensity has slightly eased the incessant pricing pressures p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px The top four US carriers Delta Southwest American Airlines and United Airlines more than 80 market share currently have a larger fleet capacity wider network coverage and the ability to better manage resources by aligning supply and demand more efficiently This has led to increase in passenger yields average fare per passenger per mile traveled by more than 38 in the last five years amid consistent spurts in revenue passenger miles 18 since 2009 and a rise in load factor capacity utilization to 83 5 currently from 80 4 in 2009 p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px strong Improved operational practices present a favorable outlook strong Most airline companies during the ensuing consolidations simultaneously experienced substantial declines in fuel bills 50 drop in crude oil prices and increased capacity discipline In other words in 2Q2015 the industry s system wide cost per available seat mile ASM declined by 13 4 YoY to 11 6 cents and other costs per ASM excluding fuel fell by 9 This means carriers today are far more optimal with their aircraft ownerships and have managed to reduce the frequency of maintenance incidences Moreover carriers now more carefully pace the retirement of their aging fleet inducting better quality and more fuel efficient aircraft p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px Admittedly the recent 4 6 YoY drop in quarterly passenger yields for both network and value carriers driven by decline in utilization is a concern in 2017 as well However as carriers are increasingly inclined towards limiting their capacity expansions ASMs with some of them downsizing capacity to improve utilization their long term unit revenue and margin growth scenarios appear positive p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px strong Ongoing deleveraging of balance sheet lowered future bankruptcy risks strong The balance sheet shows the phasing out of the previously held burgeoning debt Low energy prices have enabled airlines to significantly reduce the use of hedging strategies helping them create substantial cash savings which the companies use to lower their persistently high financial leverage through opportunistic debt prepayments and return cash to shareholders through stock buybacks p p class txti2 style text align justify color rgb 47 88 151 line height 20px font size 14px font weight normal margin top 5px strong Growth levers on a strong footing strong p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px strong Demand growth persists amid improving market dynamics strong Today the air traffic consumption shows a much healthier trend demand for top seven players grew at an average of 6 9 YoY in 2016 on revenue passenger miles basis compared to the feeble growth rates 1 7 YoY prevailing prior to 2012 Much of this is a reflection of the oft spoken issue of the ongoing economic recovery and continued surge in the consumer confidence index in recent times 95 7 in February 2017 4 higher than last year However the industry is witnessing newer concerns and challenges Of particular significance are the events surrounding Brexit owing to the partnership with British Airways American Airlines has over 6 capacity directly related to the UK markets and the potential revocation of the North American Free Trade Agreement by the Trump administration Of course these are potential headwinds for international markets but the US travel demand constituting more than 70 of the overall market on RPM basis largely remains unaffected by these extraneous uncertainties The outlook for domestic travel demand which to a large extent is a corollary to consumer spending appears favorable In 4Q16 when consumer spending in the US rose by 2 8 YoY the demand for the services of regional carriers the flag bearers of domestic routes was higher than that for legacy carriers As most economists also expect increase in consumer spending through 2017 the carriers would continue to see air traffic growth p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px strong Newer revenue dimensions bode well for carriers strong Airlines are always under pressure to maintain low airfares leaving them with limited scope for maneuverability Nevertheless this trend might see a turnaround as amid improving market dynamics carriers are preferring to raise airfares to achieve unit revenue growth targets for this year To this effect airfares rose by 1 9 MoM in 4Q16 followed by another 1 3 MoM hike in 1Q17 While this may not necessarily be the new normal the drop in airfares is unlikely to materialize at least this year p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px Furthermore with improved market segmentation demand forecasting models enabling differential airfares for less price sensitive customers increased income from ancillary services and diffusion of digital technology driving enhanced travel experiences carriers can compete on other non price factors as well This also means creating the scope for relatively more inelastic demand curves for their respective products p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px strong Energy price movements unlikely to cause immediate distress strong Speculations are growing around the crude oil price recovery and its potentially debilitating impact on airline profitability Crude oil is currently trading at 53 barrel a lower than moderate upswing from its historic lows but the price increases are likely to be less modest in the foreseeable future This conflicting view can be attributed to new emerging realities surrounding the simultaneous rise in the US oil inventories and China partnering with other countries to increase oil production The resultant capacity increase is expected to offset the production cuts initiated by Russia and OPEC economies thus retaining the current oil oversupply scenario in the near term p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px The impending gradual rise in oil prices may not entirely be as alarming for airlines given that a price slump has historically been seen as having an adverse impact on economic activity This means that a surge in fuel prices could boost travel demand as long as carriers can pass on the costs to customers judiciously p p class txti2 style text align justify color rgb 47 88 151 line height 20px font size 14px font weight normal margin top 5px strong Innovation and disruptive customer models are the new catalysts strong p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px It is becoming increasingly imperative for carriers to not only exceed passenger expectations but also react quickly to operational disruptions Those adept at leveraging new and advanced technologies to respond instantly to the ever connected digital passengers will be successful p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px For instance the complexity of airline schedules is expected to further increase in the future Carriers will thus be under increased pressure to avoid disruptions in schedules delays that commonly occur at large airports by quickly re booking passengers and offering them a seamless mobile and friendly experience p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px Furthermore legacy carriers full service airlines will need to continue innovating their business models and extend unique guest experiences to safeguard their market holdings This is even truer today as low cost carriers are entering the space with their own disruptive models For instance Southwest Airlines has begun offering passengers a diversified set of services that were usually the exclusive domain of full service airlines These include no extra charge for cancellation to lure business travelers international flights onboard Wi Fi priority boarding and others p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px To this end new disruptive ideas have begun to emerge and will change the way customers fly in the future For example passengers checking in with their coffee at Starbucks smartwatch enabled boarding passes cabin crew equipped with phablets and google glass electronic bag tags and luggage trackers to help passengers trace their luggage in real time and many others p p class txti2 style text align justify color rgb 47 88 151 line height 20px font size 14px font weight normal margin top 5px strong Conclusion strong p p class blogtxtcomm style text align justify color rgb 88 89 91 font size 13px font weight normal margin top 5px One thing that seems certain is that with the improving services which are also becoming increasingly personalized and frictionless the airline industry appears in a better shape to capitalize on new opportunities Nonetheless the next leg of growth for the industry will depend on how effectively carriers navigate operational issues such as expected cost increases technological impediments and speed of customer handling An important point worth considering is how well the carriers handle the delicate balancing act of providing extraordinary services while managing the cost of delivering these Overall irrespective of whoever wins or loses the industry at large stands to gain from these developments p p strong nbsp strong p