Fascinating Airline Financial Analysis

Most US airlines enjoyed excellent results for their third quarter

Bob Herbst of AirlineFinancials.com has just released this fascinating analysis of the major US airlines’ third quarter results.

The interesting elements that I see are first of all a picture of AA’s considerably ‘behind the eight-ball’ position compared to other major carriers; which is why there are calls for, or guesses about, it going through a Chapter 11 re-organization.  Its labor costs are appreciably higher than that of other airlines, its cents/mile return is slightly lower, and its profits massively lower.  A nasty combination of factors.

Secondly, although Southwest Airlines is the poster-child of the ‘airlines can be profitable’ concept, it seems clear that its profitability, at least in this quarter, is much more fragile than that of the dinosaur carriers it competes with.

The following material comes from his company, and features his commentary, not mine.


3rd Quarter 2011 Selected Financial/Operational Metrics for Major US Airlines

Comments as noted:

Net profit/loss

UAL =    $773M
DAL =    $765M
ALK =    $131M
LUV =    $122M
LCC =    $ 95M
JBLU =   $ 38M
AMR = -($162M)

While most of the carriers have recently been reporting consistent quarterly profits, AMR continues their losing streak.

Operating income (more important to look at than net)

UAL =   $1,055M
DAL =   $1,030M
LUV =   $   247M
LCC =   $   193M
ALK =    $  145M
JBLU =  $  108M
AMR =   $    39M

Both United and Delta have begun taking advantage of their merger related synergies and now have significant -air fare- pricing power that is inherent with the industry consolidation.

Operating “margin”

ALK =   12.1%
DAL =   10.5%
UAL =   10.4%
JBLU =   9.0%
LUV =     5.7%
LCC =     5.6%
AMR =      .6%

After accounting for the size of each carrier, Alaska continues to outperform the industry in margins.

Total (absolute) revenue (in millions)

UAL =    $10,171
DAL =   $   9,816
AMR =  $   6,376
LUV =   $   4,311
LCC =   $   3,436
ALK =   $   1,198
JBLU = $   1,195

United and Delta, due to their mergers with Continental and Northwest, have become the big gorillas of the industry. Combined revenues from just United and Continental now total more than the rest of the entire US airline industry (passenger airlines). United’s revenue alone is more than the total of Southwest, US Airways, Alaska, and JetBlue.

EBITDAR margin

ALK =   24.1%
JBLU = 16.7%
UAL =   16.0%
DAL =   15.3%
LCC =   12.2%
LUV =     8.4%
AMR =    7.4%

After excluding interest, taxes, depreciation/amortization, and aircraft rents, Alaska is by far, the financially strongest carrier with American being the weakest.

Wage benefit ratio of operating revenue / operating expense (mainline operations)

JBLU = 19.7% / 21.7%
DAL =   21.2% / 24.9%
LCC =   21.9% / 23.6%
UAL =   24.1% / 26.1%
LUV =   26.6% / 28.2%
ALK =   26.8% / 33.2%
AMR =  31.5% / 32.1%

Since 2007 and the upsurge in fuel costs going from approximately 10% of each airline’s operating costs to 30+%, labor has paid the price as most airline labor groups took huge concessions after 9/11.

Overall labor cost ratio differentials for the airline industry are largely affected by labor contract productivity work rules more so than (current) hourly pay rates.

Pilots from United, Delta, American, and US Airways are currently in contract negotiations and now earn approximately what they were back in the mid 1990’s and  -unadjusted– for inflation.

Unit labor costs (wage & benefits cents per mile)(mainline operations)

JBLU = 2.39
LCC =   3.03
DAL =   3.12
LUV =   3.44
UAL =   3.49
ALK =   3.81
AMR =  4.03

While each airline has a unique operation from their competitors, the unit labor cost differential can but not always, play a large part of the overall profit/loss for each carrier. i.e., JetBlue and Alaska are similar size airlines which have the lowest and second highest unit labor costs but are still both profitable.

American’s labor costs consistently rank as the industry’s most expensive in large part because competing carriers were able to shed labor contract work rules via bankruptcy. While American’s hourly wage rates are more-or-less industry competitive, their work rules drive the industry’s lowest productivity.  

Mainline system yield (cents/mile) / load factor

ALK =   14.70 / 87.0%
LUV =   14.69 / 82.0%
UAL =   14.56 / 86.1%
DAL =   14.32 / 86.9%
AMR =  14.21 / 84.9%
LCC =   13.76 / 86.5%
JBLU = 13.04 / 84.5%

Yield driven by high(er) load factors provides a significant indicator for an airline’s revenue performance and competitiveness.

Accepting the above, yield is affected by each airline’s “unique” operation. Fundamentals such as domestic/international, long/short haul, premium seating and global alliances all play a role in “yield” performance. 


Data excludes ex/special items- Some data may be estimated

DAL = Delta
UAL = United
AMR = American
LCC = US Airways
LUV = Southwest
ALK = Alaska
JBLU = JetBlue

Disclosure- The above opinions and comments should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family did not hold stock and/or derivative positions in any of the airlines covered in this article.

1 thought on “Fascinating Airline Financial Analysis”

  1. Interesting info. What are the work rules that causes American to be so much higher in Labor costs? Is the union biting the hand that feeds them by not allowing changes? Maybe the info is there, but I wonder how much fuel costs (and hedging) enters into the profits. Also how much of revenue is from baggage fees, perferred seating fees, etc. which vary all over the map for various airlines? What is the added cost (per mile) of flying short haul routes vs. long haul? Hard to see exactly what causes the discrepancies.

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