Airlines haven't been this profitable since 1978

retro_flight_attendant.co.top.jpg By Chadwick Matlin, contributor


FORTUNE -- At least all those extra airline fees are doing some good -- for the CEOs that are charging them, that is. Over the last week, airlines have announced their quarterly earnings statements, and they're all written in black. Delta (DAL, Fortune 500): $363 million in profit. United (UAUA, Fortune 500): $387 million. Continental (CAL, Fortune 500): $354 million. JetBlue (JBLU) had its best third-quarter ever. Southwest's (LUV, Fortune 500) revenue rose nearly 20 percent.

For an industry that's supposed to be suppressed in times of economic downturn, that's incredibly good. Good for the corporations and shareholders, that is. Average consumers, meanwhile, should be concerned. Because the profits aren't stemming from more people are buying plane tickets -- rather, it's that plane tickets cost more money to buy.

Some historical context: This is the airline industry's best quarter since 1978. Back then, Pan Am and TWA still ruled the skies, JetBlue and AirTran didn't exist, and Capt. Sully was flying an F-4 Phantom II in the Air Force. It was a different era of commercial flight.

And a profitable one, according to data from Vaughn Cordle, the chief analyst at Airline Forecasts in Washington, DC. Cordle's data, which includes private and public companies for the last 30 years, claims that the industry's quarterly net margins -- profit after legal, regulatory, etc. fees are taken into account -- is the highest in 32 years. Those net margins: 7.7 percent. This quarter, in other words, is a once-in-a-generation success.

(One caveat: His 2010 data includes only public companies for now, since those are the only ones that have reported. But they also the companies that bring in the large majority of the industry's revenue.)

So how did the airlines actually manufacture that success? By raising prices, adding fees, and cutting seats. Let's review how recessions torpedo airline business models, and what the carriers do to calibrate to the new normal:

  • First, people stop having as much money or credit as they used to.
  • Then people stop spending as much money on flights.
  • The airlines, stuck with their pre-recession routes and schedules, stop making as much money. This is why, in 2008, the industry's net margin was a negative 5.3 percent.
  • The airlines adapt. By merging:

The newlyweds: Delta and Northwest; Continental and United; Southwest and AirTran. The mergers consolidate the industry and soon thereafter consolidate travelers' options. Fewer airlines means fewer flights, and fewer flights means fewer seats.

In 2009, before the mergers, airlines reduced their capacity by 5.9 percent from the previous year, according to Cordle's data. It's expected the industry's overall capacity will now be in flux, perhaps with some new seats added as airlines fill in the gaps left behind by the mergers.

After capacity and competition are cut, it's time to nickel-and-dime. Stand-by charges, cancellation penalties, and, of course, baggage fees are all in play for airlines now. (For most of us, that may be for the best, since it keeps the actual ticket price slightly lower for those who only bring a carry-on.)

This is how the airlines start making money again. By cutting capacity and raising fees, they shed themselves of unprofitable customers and extracted a bit more cash out of those who could still afford to fly.

But are things really as bright and cheery as they appear at 30,000 feet? The third quarter is always the best quarter of the year, and even though this was the best in 32 years, there are hitches on the horizon.

Cordle estimates that there are $20 billion of costs that are going to land on the airlines in the next four years. This is just an estimate -- there may not be $4 billion in labor costs, new security regulations may not end up costing $2.7 billion, a new FAA reauthorization bill may not add $2 billion in passenger facility charges, etc. But it's likely that the cost of running an airline is about to go up, very soon.

And when fixed costs go up, so do ticket prices. Which means that the ones who should be most worried about these new quarterly profits are people like us. The only profits we take away from a trip to see family and friends are emotional. The only justification for a business trip, in the age of Face Time, Skype and Google Video Chat, is the intangible of being in the same room.

So if ticket prices and fees get high enough, travelers of all stripes are going to have to start asking ourselves the same question the airlines have: At what point do the costs start outweighing the benefits? For now though, pop the pre-flight Champagne. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.21 0.00 0.00%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 4:13pm ET
Sponsors

Sections

Spencer has been a supporting member of the "Good Morning America" cast for the past three years. More

Obamacare sign ups hit 8 million, though final enrollment remains to be seen. More

Office for iPad move is a symbolic victory for Nadella's Microsoft, but the company is still weighed down by many of the same old issues. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

As Detroit moves closer to reaching a bankruptcy deal, retired civilian workers are poised to be left worse off than firemen and police officers. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.