Southwest to begin service to three new nonstop cities from Denver
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United Airlines’ lofty margin goals draw scrutiny, after a tepid market guide for 1Q2017
United Airlines has now joined most of its airline peers in officially declaring it too will achieve a positive unit revenue result in 2017; but its unit revenue and margin outlook for 1Q2017 have created some uneasiness among investors who were clearly looking for a better forecast from the airline.
The company’s margin pressure and more conservative unit revenue outlook in early 2017, versus its rival Delta, are driven by rising labour costs, United’s higher exposure to the Pacific – where overcapacity has created challenges for the large global US network airlines – and, compared with the networks of its peers, the structure of its hub network in capturing traffic flows to warm weather destinations during the US winter season.
In late 2016 United ambitiously declared it would best Delta’s margin performance by 2020. Now that the airline has drawn that line in the sand, United’s margins will be closely watched as a benchmark for progress in meeting that goal.
US airlines: a turnaround in unit revenue just as cost pressures rise in 2017
The four largest US airlines are moving closer to returning to positive unit revenue in 2017 after each of those companies has issued an improved unit revenue forecast for 4Q2016, driven by stronger yields and continued improvement in close in bookings. The yield improvement indicates that the US domestic environment is gaining some pricing traction after two years of weak fares, and the results on close in bookings continue a trend that emerged in the US market during late 3Q2016 and continued through the rest of the year.
Delta and Southwest have both publicly cited a bump in demand since the US presidential election in Nov-2016. Delta has expressed cautious optimism that the US revenue environment has turned a corner, and the positive momentum is driving the company’s confidence of climbing out of a negative unit revenue performance in 1Q2017.
Key to sustaining unit revenue momentum is keeping capacity in check over the course of 2017. American, Delta, United and Southwest have all declared their intentions to lower capacity growth in 2017, and show no intentions of revising those targets upwards. Rising fuel cost and non fuel cost inflation are the major headwinds for US airlines in 2017, which has resulted in Delta declaring margin compression for the year.