Outlook 2014: Sunnier Skies for the Airlines

Airlines can look forward to a better year in 2014. And despite what you might think, that’s good news for passengers and their travel agents.

Airline passenger numbers, which topped 3 billion for the first time in 2013, are expected to increase to 3.3 billion this year, according to IATA.

“We are approaching a point where this industry will move half the world’s population from one place to another over the course of a year,” IATA director general Tony Tyler said.

Jump in profits
In December, IATA raised its global profit outlook for 2013 to $12.9 billion. For 2014, Tyler said, “We see that increasing to $19.7 billion.” If IATA’s projection is on target, that will amount to a hefty 53% increase in profits for the airlines in 2014 compared to 2013.

While consumers tend to get irritated when airlines make money, there is an upside. Many
airlines are now investing significantly in the passenger experience, adding perks and comforts that haven’t been seen in more than a decade.

And happy passengers make for happier travel agents.

Positive forces
Among positive factors spurring the airline industry’s profitable outlook are a slight drop in the price of oil; the growth of ancillary revenues, and the impact of mergers and joint ventures, which IATA said are generating better connectivity for passengers and are driving efficiencies.

Mergers have certainly had an impact in the U.S., where four giants now command the lion’s share of the market.

Some critics decry the shrinking of the number of major players, but there is little doubt that consolidation has helped stabilize an industry that over the course of its history has lost more money than it earned and is vulnerable to economic downturns, acts of terrorism and spikes in fuel prices.

Airlines get smart?
While consolidation has played a role in the airlines’ recovery, sensible decision-making – a practice that was remarkably absent in the testosterone-driven years before 9/11 – and good labor relations are also key factors.

Airline executives are beginning to understand that the important thing is to make money, not thump chests over market share.

The airlines also have learned how to better manage crises and make better business decisions in recent years. The prime example of that is Delta Air Lines.

Delta’s discipline
Since the oil spike of 2008, Delta’s CEO Richard Anderson has enforced a mantra of “capacity discipline,” and his competitors have, for the most part, followed suit. Having fewer seats to fill means flying fewer seats at deep discounts when times are rough.

Under Anderson Delta also has been conservative in its approach to its fleet. It has deferred an order of eighteen 787s that it inherited from Northwest to at least 2020. “We are not enamored of buying shiny new airplanes that don’t provide a demonstrated cash return,” the CEO said at a recent Investors Day.

For Delta, discipline in capacity and other areas has paid off handsomely. The airline expects to report profits of $2.6 billion for 2013, and “2014 is setting up to be even stronger,” Anderson said.

It will be Delta’s second consecutive year of profits in excess of $2 billion. “I don’t think any airline has ever done that,” he said.

United still lagging
United Airlines, which replaced Delta as the world’s largest airline when it merged with Continental in 2010, is having a rockier time. It is finally beginning to turn the profitability corner, netting $379 million in third quarter 2013, but CEO Jeff Smisek said that falls far short of what United should be earning.

In November, the carrier unveiled a plan to cut $2 billion in costs over the next three years, a neat trick to pull off at a time when competitors are re-investing in their products. United said it will achieve the savings through reduced fuel consumption, improved maintenance processes and other behind-the-scenes measures.

United also plans to increase revenues, primarily through boosting annual ancillary revenues by $700 million by 2017.

The carrier said it will achieve that goal in part by “optimizing distribution methods” and “giving customers new options, optimizing pricing on existing products and expanding availability of ancillary products through additional distribution channels.”

Merger challenges
The carrier has struggled with cultural differences, given Continental’s customer focus and United’s adversarial relations with its labor force. Even today, some employees proudly sport “Ex-Con” badges, and you can bet that’s not a reference to doing time.

Delta’s union with Northwest in 2008 provided the template for how to achieve an airline merger without annoying your passengers, employees and shareholders.

Delta’s experience no doubt was on the mind of Doug Parker, the new CEO of the “new American Airlines,” at festivities marking American’s merger with US Airways on Dec. 9.

It was certainly on the mind of Robert Crandall, the legendary former chairman and CEO of American, who was present at the event. “Now what American has to do is clean Delta’s clock,” Crandall told the Fort Worth Star-Telegram.

The future of AA
All eyes will be on American this year to see if it can achieve that goal, or at least match the smoothness of the Delta-Northwest merger.

There are good omens: American’s workforce, including its labor unions, were on board with the merger from the outset. And Parker has set the right tone with them, right down to the details that can mean so much – he doesn’t have a reserved parking place at the office, according to PlaneBusiness Banter editor Holly Hegeman.

No doubt he recognizes there’s work to be done to revive American’s status as an industry innovator and leader.

The coming year may shed some light on the future of JetBlue Airways and Alaska Airlines, both popular customer-friendly carriers. Can they continue to survive and thrive on their own, or will they become grace notes in the merger musical?

Southwest changes course
This also may be the year that the U.S. government discovers that Southwest Airlines is no longer the low-fare leader of the free world. As part of the Justice Department’s deal to allow the American-US Airways merger, it required the carriers to cede slots at key airports, notably Washington National and LaGuardia, to low-cost competitors.  

Southwest and Virgin America were the winners, but if the DOJ thought Southwest would use the slots to provide low-fare service to small communities, it was dead wrong.

Southwest, the largest carrier of domestic passengers, has dropped a number of small cities that were served by AirTran, its merger partner. And in December it cut three more small markets – Branson, Mo.; Jackson, Miss., and Key West, Fla.

This is not the Southwest of Lamar Muse or Herb Kelleher.

This Southwest is eyeing international service, and it plans this year to begin Amadeus Altéa – a big-boy passenger services system if there ever was one – making it the reservations, inventory and departure control platform for the carrier’s international flights.  

Ultra low-cost
As carriers like Southwest and JetBlue move toward new models, the low-cost carrier banner has been taken up by a new breed of “ultra low-cost carriers,” such as Allegiant, Spirit and, more recently, Frontier Airlines. These carriers aim to provide the absolute lowest fare possible by stripping everything except transportation out of the fare, in the style of Europe’s Ryanair.

In the airline industry, a look forward almost always includes a look back.

In October, Republic Airways sold Frontier to Indigo Partners, a private equity firm headed by William Franke. People with long memories will recall that Franke once headed America West, founded in 1981 as an early example of a low-cost carrier. It merged with US Airways in 2005.