The price of jet fuel is at its lowest point since 2003, and airlines are raking in record profits.
So where is all the money going? Are consumers and investors seeing part of the windfall from cheap fuel?
To be sure, some of the savings have resulted in cheaper airfares, which on average declined nationwide by 6 percent in the third quarter, according to government data released last week. And fares on many routes out of North Texas have declined even more thanks to enhanced competition since the Wright Amendment restrictions on flights ended at Dallas Love Field in October 2014.
“There’s lots of low fares in the market,” American Airlines President Scott Kirby told investors on the airline’s earnings conference call last month. “Consumers are having a field day in this environment, particularly with oil prices where there’s low fares.”
But fares have not dropped nearly as much as jet fuel, which has fallen 40 percent in the past year along with the price of oil. Some airlines are paying only $1.50 per gallon.
Boosted by big savings on fuel, the top five airlines in the U.S. raked in over $22 billion in profits in 2015. Fort Worth-based American posted $7.6 billion in profits in 2015 and saved over $4 billion in fuel costs.
$22 billion net income reported by top 5 U.S. airlines
Industry analysts say airlines are holding on to a significant amount of the fuel savings while investing some into new airplanes and services for customers. Investors are also seeing share buybacks as airlines try to improve their stock price.
“Airlines are working on shoring up their balance sheets,” said Henry Harteveldt, an analyst with Atmosphere Research. “They’re investing a lot of their profits in aircrafts and customer-facing improvements in the terminals and on the planes.”
What consumers are getting
Passengers boarding a plane these days may notice that new plane smell.
Airlines are purchasing hundreds of new aircraft and retiring planes that were often more than 20 years old. American took delivery of 75 mainline aircraft and 52 regional aircraft in 2015 alone.
Every customer is seeing an investment in aircraft, an investment in ground facilities and an investment in people, which generally makes for more motivated and engaged workers and better customer service.
Bob Mann, aviation analyst
Amenities like in-flight entertainment and food service are being upgraded as well as seats. JetBlue Airways is rolling out a cabin upgrade that includes new seats and larger TV screens with more than 100 channels of DirecTV.
“Our new, innovative cabin will improve our customer experience and our bottom line,” JetBlue President Robin Hayes said on a recent conference call, noting that the airline is retrofitting its Airbus A321s with a new galley and lavatory module.
Both American and United Airlines have reintroduced free snacks to economy class. The airlines are also spending millions to upgrade frequent-flier clubs at various airports.
“Every customer is seeing an investment in aircraft, an investment in ground facilities and an investment in people, which generally makes for more motivated and engaged workers and better customer service,” said airline analyst Bob Mann.
Workers get raises
For employees, the low fuel costs are translating to fatter paychecks.
American has negotiated new contracts with its pilots, flight attendants and customer service representatives that included double-digit pay raises. Southwest recently announced it was paying $620 million in profit-sharing to employees, equivalent to about eight weeks of pay per worker.
$6.9 billion American Airlines’ cash and short-term investments at the end of 2015
And then there are lower air fares. With cheap fuel prices, analysts say airlines can afford to be more competitive with their pricing. Some markets, such as Dallas-Fort Worth, have seen better-than-average declines in fares because of factors including the lifting of the Wright Amendment.
“Airlines have a lot of different fares out there, and they are being very aggressive on how they manage the low price points,” Harteveldt said.
To compete with low-cost carriers, American sells “advantage fares” on certain routes where its fare for a one-stop route is significantly cheaper than the nonstop flight. Wolfe Research analyst Hunter Keay studied these fares and saw that American was undercutting the cheapest nonstop option by 49 percent on average.
“We think the price points on those fares fell sharply when fuel prices collapsed,” Keay told investors in a January research note.
Wall Street wants more
Despite record profits and cheap fuel for the foreseeable future, investors appear uncertain about the ability of airlines to keep capacity growth under control and weather a possible recession.
Since the beginning of the year, airline stocks are down around 15 percent while the S&P 500 has declined about 10 percent.
The only beneficiaries of [year-over-year] fuel declines are employees and passengers, with no incremental value retention for shareholders.
Jamie Baker, J.P. Morgan analyst
Airlines have spent billions buying back shares and paying out dividends to shareholders. Delta Air Lines used $2.2 billion to buy back 48 million shares and $360 million for dividend payments.
“We drove all the recovery of savings on fuel to the bottom line, or certainly the vast majority of it,” Delta President Ed Bastian told investors on its conference call last month.
Delta retained about 45 percent of its fuel cost savings, J.P. Morgan analyst Jamie Baker told investors in a January research note. And he questioned why American was only retaining about 16 percent.
“The only beneficiaries of [year-over-year] fuel declines are employees and passengers, with no incremental value retention for shareholders,” Baker wrote.
Wall Street analysts suspect American’s share price, which is off 12 percent this year, is trailing competitors partly because investors want American to use its fuel savings to improve its balance sheet.
Its competitor, JetBlue, is paying cash for new aircraft deliveries and paying off high-interest debt. American executives say they have paid all of the company’s more expensive debt and believe it makes more sense to finance the purchase of new airplanes with low interest rates instead of using cash. American ended the year with $6.9 billion in cash and short-term investments.
“Investors seem to believe that American should be doing more to bring more of the fuel savings to the bottom line than it is doing,” CRT Capital analyst Michael Derchin wrote in a research note. “In our view, this ignores the fact that American is building up the business for long-term success.”