23-Dec-2010 4:33 PM

US airlines post record profit margins in 3Q boosted by ancillaries

Analysis

US airlines made more than half of their third quarter profits from baggage and change/cancellation fees, according to data just released by the Department of Transportation's Bureau of Transportation Statistics.

Total third quarter 2010 airline revenue from all identifiable ancillary sources, including fees and frequent flyer sales was USD2.1 billion, with Delta Air Lines reporting the highest total at USD693 million.

Baggage and reservation change fees, combined with ancillary revenue from other sources constituted 5.8% of the total revenue of the 26 carriers that reported receiving ancillary revenue. Not surprisingly, Spirit Airlines reported the largest percentage of operating revenue from ancillary sources of any carrier, 26.9%.

Ancillary Revenue Compared to Total Operation Revenue

Record profit margins

The third quarter airline financial data showing the six network carriers posted impressive profit margins at 10.5% in 3Q2010 with a combined operating profit of USD3.0 billion. This compares with the 3Q2009 when the network carriers posted a 1.4% profit and a combined profit of USD338 million.

While low-cost carrier profit margins reached 11% - the sectors second highest for the quarter - the network carriers' profit margin was the highest third quarter margin since the Bureau of Transportation Statistics began keeping records. Low-cost carriers, with their smaller contingent, posted USD635 million in profits, their eighth consecutive profitable quarter. Alaska, Delta and JetBlue reported the highest operating margins. BTS did not release regional airline statistics owing to incomplete data.

Network Airline System* Quarterly Operating Profit/Loss Margin (In Percent)

Low-Cost System* Quarterly Operating Profit/Loss Margin (In Percent)

Ancillary revenues boost profits

More than half the profit resulted from two types of ancillary revenues marking just how important they have become to industry health. BTS released the bag and change/cancellation fee data last week.

Baggage fees and reservation change fees are the only ancillary fees paid by passengers that are reported to BTS as separate items. Other fees, such as revenue from seating assignments and on-board sales of food, drink, pillows, blankets, and entertainment are reported in a different category with other items and cannot be identified separately.

Rising costs

Just as airlines have been reporting, BTS released statistics concerning fuel costs which rose by double digits since 2005 at 13.1%, rising half a percent to become 25% of operating costs, although that is an improvement over 2008 when fuel passed labor costs. Meanwhile, LCCs fuel rose 63.0% since 2005, becoming 32.7% of costs at USD1.7 billion.

Fuel prices this year reflect the renewed volatility of such costs rising considerably from 3Q2009 to USD3.69 but falling to USD3.54 in 3Q2010.

Passenger Airline System* Fuel Costs Per Available Seat-Mile

Despite concerns over rising fuel costs, unit costs for the network carriers declined from the first quarter but were up from 13.7 cents in the third quarter 2009 period to 14.2 cents while LCC unit costs were generally flat during the sequential quarters since 1Q2010.

Passenger Airline System* Unit Costs

Unit revenue for the network carriers rose two percentage points in the year since 3Q2009 rising to 15.8 cents per available seat mile in the third quarter for a total network operating revenue of USD28.2 billion. LCCs earned USD5.8 billion in unit revenues rising a little more than 1ppt to 11.7 cents per ASM.

Passenger Airline System* Unit Revenue

Network yield also rose nearly two percentage points to 13.0 in the third quarter and totaling nearly USD20 billion. LCCs yield rose just over a point to 12.7 per RPM for a total of USD5.2 billion.

Airline System* Passenger Revenue Yield

US airlines post record profit margins in 3Q boosted by ancillaries

Record profit margins

Ancillary revenues boost profits

Rising costs

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