There’s no doubt that the rising demand for air travel is encouraging airlines to focus on the need for new capacity and the potential to expand revenue and market share — even if such moves mean potentially sacrificing margins and reducing yield. This year’s Airline Economic Analysis reinforces earlier findings that adding capacity at a pace faster than US economic growth has contributed to carriers’ eroding margins over the past several years.
GDP took a sudden slide in 2016 to below two percent as the trade deficit ballooned and oil prices plunged. While airline capacity growth also began to slow, it failed to match the drop in GDP. That’s when margins began to fall, despite lower oil prices.In January 2016, prices per barrel slid to around $35 from a high of more than $110 in 2014. Although prices quickly recovered to above $50, they have not returned to the $80-plus levels they had maintained between mid-2009 and October 2014.
One caveat: While margins have tightened since 2015, they are still higher than they were from 2010 to 2013, when they were six percent or lower and oil prices were consistently above $80. The fact that margins were in the teens from 2015 to 2017, even though on the decline, reflects the impact of lower oil prices.
While airlines remain profitable, the prospect of slowing GDP may force carriers to reassess capacity expansions, especially given rising pressures on operations from that rapid growth. Indeed, the industry’s biggest risk over the next decade may be failing to strike the right balance between capacity and profitability at a time when managing operations grows increasingly difficult.
Oliver Wyman’s Grant Alport, Andy Buchanan, and Aaron Taylor contributed to the research and insights in the 2019 Airline Economic Analysis and in this article. Grant is a principal, based in Washington DC, in the transportation practice. Andy is a vice president, based in Chicago, in the transportation practice.