There's Potential Turbulence On the Horizon for Many U.S. Airlines
The American people are already discontent with the prices and fees they have to pay in association to flying. From the tickets themselves to taxes, check in fees, baggage add-ons and any in-flight needs they may have, the cost of flying has drastically increased over the past 10 years alone.
Now citizens are potentially in for even steeper airline fees as airlines are feeling great pressure to increase revenue while simultaneously looking at expense increases.
Reasons for Discontent
Three of the most costly expenses any airline faces (fuel, labor, maintenance) are projected to rise in 2017. Consider a best case scenario in which even two of these costs stay the same — if even one area of cost increases, the price will be reflected in how much people pay for plane seats.
As 2016 drew to a close, OPEC and non-OPEC oil producers cut back production. Because of the slowdown, oil prices have a very likely potential to increase to over $50 a barrel, but thus far the oil prices have stabilized. Depending on how much fuel does rise or fall in price directly correlates to the profitability of airlines.
While this is an area of cost that isn’t certain, both labor and maintenance costs are guarantees. Usually fuel is the most expensive cost within an airline, but labor costs will likely become their number one expense this year. Negotiations for labor contracts have been ongoing with both larger and value carriers. Simultaneously, many airlines have switched to more fuel-efficient aircrafts and systems, but many still hold on to older models that require massive maintenance and repairs.
There’s also a question of competition. Airlines like American and Delta are starting to see cheaper, more basic airlines like Spirit taking a lot of their revenue stream in select cities. While airlines like Spirit have a much narrower focus in terms of what cities they will fly to, these are usually major cities within the U.S., and major airlines receive large revenue streams from these hubs of travel.
Foreign competition is also beating out larger airlines in the race to expand to other continents, like Asia and Europe. These airlines are capitalizing on the fact that many major airlines don’t have convenient access to these countries on their own. This comes after the airline industry had historic profitability in 2016 — it’s likely a profit boon that won’t be seen again for years to come.
Network vs Value Airlines
Examining the numbers themselves, it may look like network airlines are doing alright in terms of fiscal profits. After all, air travel took up 1.10% of America’s GDP in 2016. However, upon examining the 2015 air travel GDP stat, there is a noticeable drop — from 1.17% in 2015 to 1.10% in 2016. Despite the fact that these numbers are essentially the same when it comes to rounding, even that small a percentage translates to over $1 billion in lost sales.
Meanwhile, value airlines saw a spike in sales. For the 2016-2017 year statistics, value carriers saw an increase in quarterly revenue of $300 million. You can see where the battle for financial stability is in this example — more established airlines are losing out to airlines that offer discounted rates. Americans are now more willing to have a lower quality flying experience if it means getting them from Point A to Point B for a lower price. On the foreign airline side of things, seat capacity on Latin American flights has almost doubled since 2011, with other foreign territory seat capacities going up at smaller (but still noticeable) percentiles.
As 2017 has only just begun, the actual fate of airline expenses are still up in the air, so to speak. A more concrete data presents itself, we’ll soon see just how greatly the air travel industry is affected by these increased expenditures.