Rising costs threaten profit margins of the Airlines in 2018
New York - Airlines' fuel, labor, and maintenance costs are rising. Investors fair that industry's rising costs threaten margins throughout a record stretch of profitability.
The disbursements of the nine largest airlines in the US rose 8.1% in the first nine months of 2017 compared with the same period of the previous year while incomes rose only 3.8%, according to the Airlines for America trade group. The uptrend in expenses is above the overall U.S. inflation rate of 2.2%.
The imbalance between the expenses and revenues caused to decrease pretax margins of the nine US carriers to 12% from 15.5% in the same period of the year compared again with the year before. The continuous rising seat cost per mile is an alarming trend for the industry.
We think the airlines have to some extent lost focus on good cost control,said Darryl Genovesi to Wall Street Journal, an airline industry analyst at UBS.
After fuel prices, the highest cost increase occurred in the workforce. From the end of 2016, US carriers had to sign costlier labor contracts to match the pay offered by rivals. In October, Delta Air Lines rearranged its profit-sharing program to give all workers the same rich terms as its pilots. JetBlue Airways and Spirit Airlines are about to renew pilot contracts which will raise their compensation costs remarkably.
American, United, and JetBlue also have constant attempts to create new revenue sources. American expects to cut $1 billion in costs over the next four years by increasing productivity, and operating its fleet more effectually, CFO Derek Kerr said in September.
JetBlue executives declared that they plan to cut $300 million in costs by 2019. United also said that the company intends to create $4.8 billion additional revenue by 2020, including some $1.8 billion at the end of this year.
Airlines are also trying to overcome rising costs by installing more seats in the cabins or putting larger aircraft into service to distribute fixed costs over more seats. These measures can provide more revenue on the paper, but squeezed seats and reduced legroom may not be preferred by some passengers.
The U.S. carriers still perform well in general. The industry is on track for a record eighth-straight year of profits in 2017.
But to preserve the profit margins, the companies need to arrange labor expenses accordingly and take extra precautions to cut costs, said Savanthi Syth, an analyst with Raymond James & Associates.