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Airline Revenue Recovers, But Consumers Will Continue to Pay More

Airlines & Airports Gretchen Kelly June 24, 2013

Airline Revenue Recovers, But Consumers Will Continue to Pay More

Airline revenue growth has recovered to pre-recession levels and the U.S. airline industry is expected to continue profitability in 2013, according to Tailwinds, a report on the airline industry from PwCUS.  Statistics from the report also say that, while the industry has become better at managing capacity and generating ancillary revenues, it is challenged with rising costs for fuel, labor and maintenance.  Airlines are expected to pass some of those costs along the flying public in the form of ancillary or extra charges—a process that has escalated in recent years.

"There's no question the domestic airline industry is undergoing a renaissance marked by increased revenue and stable profitability," said Jonathan Kletzel, U.S. transportation and logistics leader, PwC. "The price of domestic airline tickets has increased in line with inflation over the past five years, growing less than two percent in real terms, and airlines have boosted revenue by charging new fees as well as introducing ancillary products.  When taking into account all fees and ancillary revenues, airlines are seeing as much as a nine percent increase in average base airfare.  Going forward, you can expect airlines to roll out additional sources of revenue, by strategically charging fees and bundling services that are aimed at enhancing the travel experience. These factors, combined with the prospect of lower fuel prices, support a positive outlook for the industry in 2013."

Labor expenses, which accounted for approximately 23 percent of airline expenses in 2012, are also on the rise, according to the report.  Over the past five years, average salaries for airline employees have been increasing due to consolidation. 

"When airlines negotiate merger terms, they often agree to higher salaries in order to gain union buy-in, reversing some of the reductions implemented during past bankruptcies," Kletzel explained.  "An impending pilot shortage is also likely to result in higher pilot salaries. Starting in August, new commercial co-pilots will need a minimum of 1,500 hours flight experience, six times the current requirement.  Next year, the Federal Aviation Administration will also require more rest time between flights. These changes are coming at a time when baby boomer pilots are reaching the mandatory retirement age, military pilots are staying in the military longer, and foreign airlines are competing for pilots."

The report also projects that regional airlines will move to replace smaller 50-seat aircraft with larger planes. "Less than 20 years since its introduction, the 50-seat jet is once again having a game-changing effect on the airlines. Only this time, the aircraft is being viewed as a liability in terms of cost effectiveness," Kletzel said.  Larger jets will also give airlines a reason to—yes, you guessed it—raise fares. Kletzel points out that with larger aircraft, airlines can add in first or premium economy sections for higher price tags. Recent statements by American Airlines on a planned increase in numbers of seats also point to another revenue booster not beneficial to consumers--more seats equal more revenue but a lot less leg room.