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U.S. Department of Justice

Airline profits soar yet no relief for passengers

Thomas Frank
USAToday
An American Airlines aircraft takes off from Dallas-Fort Worth International Airport.

Air travelers wondering how they would experience the recent wave of airline mergers appear to have an answer: Airplanes are more crowded than ever, fares remain at a five-year high despite plummeting fuel costs — and airlines are reporting record profits and soaring stock prices.

The four major airlines all reported huge profits for 2014 in the past week — and made clear that they have no plans to cut airfares or to increase the number of seats.

"We're going to continue operating American as though oil was still above $100 a barrel," American Airlines Group CEO Doug Parker said Tuesday morning, as he announced its largest annual profit of $4.2 billion in 2014.

Wall Street agrees and has lifted share prices of the four major airlines — American, Delta, Southwest and United — to record levels in recent days following year-end earnings announcements. United's stock, which was $3.17 on June 24, 2009, closed at $73.62 on Monday.

"The airline industry has transformed itself over the last several years," United Airlines CEO Jeff Smisek said last week.

But passengers are not likely to share in the airlines' windfall, which has come as jet-fuel prices have fallen to their lowest level in four years, and a wave of mergers since 2008 eliminated AirTran, Continental, Northwest and US Airways. Airline CEOs said in recent days that they are focused on reducing debt, upgrading airport facilities, paying dividends to shareholders and profit-sharing with employees.

"It's an oligopoly, and we have three airlines that have made it quite clear that we're not going to see the kind of competition we saw before," consumer advocate Bill McGee said, referring to American, Delta and United airlines. Southwest runs its business differently from the other three because it does not operate major airport hubs like they do.

Airfares in 2014 were at their highest level since 2003, according to Department of Transportation inflation-adjusted figures. And flights in the USA ran at 81.6% capacity in the first 10 months of 2014 — a record level that is likely to continue to increase. At some airports, such as Atlanta's Hartsfield-Jackson, Denver International and Orlando, Palm Beach and Fort Myers in Florida, departing flights were more than 85% full last year. Flights were 69% full on average in 2003 and 56% full in 1991, according to the DOT.

U.S. airlines have recorded six consecutive quarters of profit for the first time since 1999-2000, and made a combined $8 billion in the first three quarters of 2014, according to DOT figures.

The profit is largely due to falling fuel prices, which airlines expect to stay low through this year.

"The entire change in fuel prices flows directly to our bottom line," American Chief Financial Officer Derek Kerr said Tuesday, estimating that the airline would spend $5 billion less in fuel this year than it did in 2014. Fuel is typically the top expense for airlines, representing about a third of annual operating costs, slightly ahead of salaries and benefits. Airlines added "fuel surcharges" of several hundred dollars to international flights when fuel prices began rising in 2011, and many remain in place.

The lack of movement in airfares drew criticism from Sen. Charles Schumer, D-N.Y., who called it "curious and confounding that ticket prices are sky-high and defying economic gravity" as fuel prices fall. "The industry often raises prices in a flash when oil prices spike, yet they appear not to be adjusting for the historic decline in the cost of fuel," he said.

Airlines also are maintaining special fees, and are on track to collect a record $6.4 billion in baggage fees and reservation-cancellation fees in 2014, according to DOT figures.

"The competitive dynamic has definitely changed," said aviation analyst Robert Mann. "You have fewer carriers, and you have carriers that are of the mindset that they want to produce returns that make them attractive investment alternatives."

The transformation, running from 2005 through late 2013, saw a series of mergers that whittled the number of major airlines to four — the smallest number since at least 1978, when the airline industry was deregulated, according to the Government Accountability Office.

The final merger, between American and US Airways, was initially opposed by the Justice Department, which said in a brief that the other merged airlines had "in tandem, raised fares, imposed new and higher fees and reduced service. Competition has diminished and consumers have paid a heavy price." The Justice Department dropped its objection after American and US Airways agreed to foster competition at major cities such as New York, Los Angeles and Chicago.

The GAO said in a report last year that U.S. airlines eliminated about 1.2 million flights from 2007 through 2013.

Airline executives say they are using "capacity discipline" — limiting the number of seats, which helps keep prices high — and will continue that practice.

"We will absolutely not lose our capacity discipline," United's Smisek said last week as the airline announced a $2 billion profit in 2014, nearly double its profit in 2013. "It's very healthy for us and very healthy for the industry."

Airlines incurred huge losses starting in 2001, when the Sept. 11 terrorist attacks dramatically reduced demand, and followed by the Great Recession in 2008. From 2001 through 2009, U.S. airlines lost a combined total of $58 billion and were profitable in only two years, according to DOT figures.

Parker of American said the airline is tying ticket prices to demand, not to airline costs. "Demand remains strong, and that's what we should base our pricing on, not our cost structure."

Harvard Business School professor Benjamin Edelman, who follows the airline industry, said he's also seen in recent years reductions in frequent-flier awards and fees added for features such as early boarding and seat selection. "All that is just what you'd expect when there's less competition," Edelman said.

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