Tags: airlines | profits | fuel | jobs | restructuring

Expert: Hefty Airline Profits Tied to Downsizing, Not Fuel Costs

By    |   Tuesday, 28 April 2015 06:39 AM

The first quarter profits announced by four major airlines are not solely due to lower fuel costs, writes one expert.

In a Forbes piece, airline expert Dan Reed argues that other factors are contributing to airlines' big profits: a shrinking workforce in the industry and financial restructuring.

"In the year 2000 U.S. operators of conventionally-sized mainline commercial jets spent a combined total of $33.3 billion on their workforce's wages and benefits, according to the MIT Airline Data Project," writes Reed, who notes that airlines have cut about 150,000 jobs since 2001. "In 2013 they spent only $1.1 billion more than that — $34.42 billion on labor. That means U.S. airlines' labor expenses in 2013 actually were $11 billion less in 2013 when measured in constant 2000 dollars.

"Had their labor costs simply grown at the same rate as inflation over those 13 years, U.S. carriers would have reported a loss of more than $1 billion on operations in 2013 (assuming all other inputs remained as actually reported). Instead, they earned a combined $9.7 billion operating profit.

"Certainly rising revenues — from relatively modest but noticeable fare increases over the last decade and the imposition of all those additional fees and charges — helped. But effectively lowering their labor costs relative to the rate of inflation has been the single biggest factor in airlines' new-found profitability."

Reed says the other factor, financial restructuring, has come about largely through the Chapter 11 process and mergers. It has led to a large decrease in long-term debt, thanks in part to simply having less planes.

From 2000 to 2013, according to Reed, the U.S. fleet of airplanes — not including regional jets and turboprop planes — shrank 9 percent.

A smaller fleet also bumped up ticket prices at the consumer level by reducing the total number of seats available.

"Taken together, that explains why airlines are making big profits at a time when they're still paying some of the highest prices ever for jet fuel," Reed writes.

"In 2000 they paid, on average, 80 cents a gallon, and managed to earn a $6 billion combined operating profit. In 2013 they paid an average of $3.03 a gallon — the second highest average price per gallon in industry history — yet earned $9.7 billion in combined operating profits."

Delta announced two weeks ago it would cut its number of international flights by 3 percent starting this winter because of a stronger dollar.

The FBI, meanwhile, recently warned airlines to be on the lookout for in-flight hackers in the wake of a security expert's suggestion he could gain access to a plane's computer through its passenger Wi-Fi network.

After Chris Roberts, who has spent years researching airline security, jokingly tweeted this month that he had gained access to the computer on the plane he was traveling, the FBI removed him from the plane once it landed. He was questioned for four hours before being released.

"I tweeted out something in jest with a smiley face, and I'm guessing that was probably the final straw for at least one area of the federal authorities," Roberts said.

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The first quarter profits announced by four major airlines are due more to a shrinking workforce and financial restructuring than to lower fuel costs, writes one industry expert in Forbes.
airlines, profits, fuel, jobs, restructuring
Tuesday, 28 April 2015 06:39 AM
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