2015 3rd Quarter Airline Earnings Season In Review

In the 3rd quarter of 2015, airlines in North America continued posting record profits, continuing a trend started at the beginning of this year after oil prices tanked in the 4th quarter of 2014.   

Airlines in North America Continue String of Record Profits, Revenue Drop a Concern 

American Airlines led all airlines in North America with a company record $1.9 billion dollar profit, excluding special charges, nearly doubling its profit in the same three month period a year ago. However, Revenue dropped 3.9% to $10.7 billion dollars.   

United Airlines posted a $1.7 billion dollar profit as spending on fuel decreased a whopping 38%, equal to $1.1 billion dollars in savings. However, revenue decreased 2.4 percent to $10.31 billion along with revenue per mile, which decreased 6%. United is forecasting further drops in revenue per mile in the 4th quarter, a cause for concern for investors.  

Delta Air Lines recorded a $1.32 billion dollar 3rd quarter profit, beating Wall Street forecasts. However, revenue was down less than 1% to $11.1 billion dollars. Like United, Delta Air Lines also saved nearly $1.1 billion dollars in fuel spending due to low oil prices.     

Alaska Airlines posted a $274 million dollar profit, up 38% from the same period a year before and its highest quarterly profit ever. Alaska Airlines saw its revenue rise 3.4% to $1.52 billion dollars while its load factor decreased 0.4% to 86%. 

Rounding out the legacy carriers, Southwest Airlines posted a record $584 million dollar profit, up 63.1% from a year earlier. Southwest saw its passenger unit revenue fall 4%, though the airline is forecasting a small increase in the 4th quarter.             

For the low cost carriers, Allegiant posted a record $44.5 million dollar profit, up an incredible 213% from the 3rd quarter of 2014. Allegiant also saw its revenue rise 13.2% to $300 million dollars while load factor decreased 2.1% to 86.1% as the airline increased capacity by 23.3%.  

Spirit Airlines posted a $97 million dollar profit with operating revenue rising 11 percent to $574.9 million. However, Spirit saw ticket revenue per passenger drop 21% as the ultra low cost carrier has become more deeply embroiled in fare wars with American and Delta. Non ticket revenue dropped 1.2%. 

JetBlue saw its 3rd quarter profit more than double posting a $198 million dollar profit. Passenger unit revenue fell 0.6% in the third quarter as intense competition brought fares down. 

Vrgin America saw its 3rd quarter profit rise 73% recording a $71.9 million dollar profit as low fuel prices buoyed the young airline's bottom line. However Virgin America saw its passenger unit revenue drop 2.7% in the 3rd quarter and forecasts a worse than anticipated 3-5% drop in the 4th quarter as the carrier increases capacity by 9-10%.   

Shifting to Canada, Air Canada posted a healthy C$437 million dollar profit in the 3rd quarter. Air Canada saw revenue rise 6% to C$4.02 billion dollars. 

WestJet posted a C$101.8 million dollar profit in the 3rd quarter, up 95% from a year before. WestJet saw  Revenue rise 3.5 percent to C$1.05 billion dollars.  

Outlook: 

While airlines in North America posted record profits in the 3rd quarter of 2015, there were some worrying underlying trends. Most airlines in North America saw a drop in revenue and were forecasting drops in passenger unit revenue as fare wars, especially in Dallas and Chicago, caused airlines to cut fares, decreasing profitability. 

This should be worrying for investors as the recent string of record profits are due to massive fuel savings instead of increased operational and corporate performance.  

Airlines saw margins in the 15-20% range in the 3rd quarter as carriers saw over a 50% reduction in fuel savings.  

Fuel savings, and the giant profits that follow them, are emboldening carriers  (especially the low cost carriers) to expand capacity and engage in fare wars. 

Even though the legacy carriers are increasing capacity by only 2-3%, they are still being drawn into fare wars with low cost carriers such as Spirit Airlines, who are increasing capacity by 10-20% a year.  

As we head into the 4th quarter of 2015, we again should see record profits as fuel prices continue to remain low. However, we could see further drops in revenue and revenue per mile as fare wars intensify, causing more investor fears.