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Dark Clouds Loom for Airlines Even as Their Profits Take Off

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U.S. airlines are producing their biggest profits ever. But instead of clear skies, they are encountering problems that their recent prosperity, in some cases, is making worse.

Employees at Southwest Airlines Co. and Delta Air Lines Inc. have rejected labor contracts in recent weeks, with some arguing that the compensation wasn’t sufficient given the industry’s financial performance. Federal regulators have started two separate probes into whether the biggest airlines have violated competition rules. And shareholders, fretting that the airlines’ success will stall, have beaten down stock prices.

“The airlines are probably doing the best jobs running their businesses in the history of the industry,” said Jim Corridore, equity analyst for S&P Capital IQ. “At the same time, they’re being attacked from many sides.”

Airlines have benefited from years of restructuring and consolidation, a tighter focus by management on profitability, and a roughly 55% drop since mid-2014 in the price of oil, which has gone from the industry’s biggest cost to its second biggest after labor.

U.S. airline earnings collectively topped $8 billion in the first half of this year alone. The companies have announced plans for large share buybacks, are repairing balance sheets and investing in their products.
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Planes are also fuller than ever. Airlines for America, a trade group, has predicted an all-time high for summer travel, and this week forecast 14.2 million passengers will fly over the Labor Day period, up 3% from a year ago. The busiest day is expected to be Friday, Sept. 4.

However, it is what passengers are spending on fares and extras that is spooking investors.

Costs have dropped sharply for airlines, pushing profits higher. But a decline in ticket prices has hurt the companies’ unit revenue, which measures the amount of money taken in for each passenger flown a mile. Investors remain fixated on that metric, which has slumped this year and may not turn around until 2016. They are watching for signs that airlines are responding to better times by over expanding, setting up another downturn.

http://www.wsj.com/articles/dark-clouds-loom-for-airlines-even-as-their-profits-take-off-1439941655

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