U.S. airlines are raking in more
per mile they fly a passenger for the first time in years, thanks to new fare
classes and customized services that are squeezing more revenue from each
customer.
In the second-quarter results
they will begin to report this week, airlines have told investors to expect the
first broad uptick in three years in the amount taken in for a passenger flown
a mile, or a seat flown a mile. These closely watched “unit revenue” metrics
had suffered amid a price war sparked by low fuel prices and the rapid
expansion of discount carriers.
Now big airlines are expanding
“basic economy” fares to compete with discounters, while also tapping new
revenue streams from fees and premium ticket classes that offer more comfort
and exclusivity.
“You’re seeing increasing product and customer
segmentation, which is generating higher average fares,” said Bryan Terry,
managing director of travel and transportation for PricewaterhouseCoopers LLP.
American Airlines Group Inc., Delta
Air Lines Inc. and United Continental Holdings Inc. all
are expected to show unit-revenue gains in the second quarter compared with big
declines in that period a year earlier. Delta, which will report second-quarter
results on Thursday, told investors last week to expect the first unit-revenue
growth since the fourth quarter of 2014.
Discounters JetBlue Airways
Corp. and Spirit Airlines Inc. are forecasting unit-revenue
growth of at least 4% after double-digit declines a year ago. Hawaiian
Holdings Inc. has forecast a unit-revenue increase of as much as
10.5%. Southwest on Monday reaffirmed guidance for growth of up to 2% in the
second quarter, disappointing some investors hoping for a higher target.
Nevertheless, such broadly
positive results would help put the airline industry on track for its eighth
straight year of profits in 2017, a record streak in a traditionally volatile
industry buffeted by unpredictable changes in fuel prices, demand and global
economic conditions. Many airline stocks are trading near their one-year highs.
Many industry watchers see last
year as a low point for airlines, coming at the end of a heated fare war. At
the time, carriers blamed everything from geopolitical turmoil, the strong
dollar and overcapacity for their poor performance. Only Southwest and Hawaiian
eked out small unit-revenue gains for the second quarter last year.
“The second quarter of 2016 was
darn near a trough,” said Kristopher Kelley, an equity analyst at Janus
Henderson Group PLC.
The tide began to turn early this
year. Merrill Lynch expects steady unit-revenue gains through the year. Cowen
& Co. thinks the second quarter will be a peak, due in part to more
domestic airline capacity scheduled to come on line later this year.
As discount carriers bring budget
fares to more markets, American, Delta and United are using basic economy fares
to attract more frugal travelers. These fares don’t include many standard perks
such as standing by for a different flight or receiving advanced seat
assignments.
The growth of discount carriers
has pushed domestic ticket prices near historic, inflation-adjusted lows, even
with change fees and checked-luggage prices added in. At the same time, major
airlines are offering more options to travelers willing to pay more. Delta and
American are introducing “premium economy” seats on international routes that
offer more perks than plain coach. JetBlue , long
a single-cabin airline, offers a luxury first-class called Mint on some routes
that is boosting its unit revenue.
Airlines are also selling
priority boarding and upgrades to business- and first-class, instead of
awarding those perks to frequent fliers, said Mr. Terry of PwC. Even Southwest,
which doesn’t charge baggage fees for the first two bags, is selling early
boarding access.
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