In words that will most surely never come back to haunt him, American Airlines CEO Doug Parker boldly declared this week that the U.S. airline industry is in such a solid place right now that he doesn’t see how it could ever end up in the red.
“I don’t think we’re ever going to lose money again,” Parker told investors at a media and investor day in Texas on Thursday. “I’ve said this for a long time; I believe it. We have an industry that’s gonna be profitable in good and bad times. We have an airline that’s going to be profitable in good and bad times.”
There are four remaining major airlines — American, United, Delta, and Southwest — that account for the vast majority of air travel in the U.S. Yet, all of these carriers, except for Southwest, have gone bankrupt at some point in the last 15 years, with American’s 2011 bankruptcy filing being the most recent.
Even these carriers’ biggest merger partners — U.S. Airways, Continental, Northwest — had all had to file for Chapter 11 protection at least once since 2002. U.S. Airways, which effectively took over American when the two carriers merged, went bankrupt in 2002 and then again in 2004.
And after the Sept. 11, 2001 attacks, which grounded all planes in the country and cast a pall over the entire industry, Congress approved a $15 billion bailout of the transportation industry, with around $10 billion going to keep these carriers from collapsing.
Beyond that, the airline industry is at the whims of weather, fuel prices, consumer demand, government regulation, and other factors. Just look at the network and software issues that have resulted in massive, system-wide outages for United, Delta, and Southwest, costing them hundreds of millions of dollars.
So why does Parker seem so convinced that it’s all smooth sailing from now on for his industry?
He points out that, combined, American and U.S. Airways netted a total of $1 billion in profit from 1978 through 2013, never cracking more than $3 billion a year in pre-tax revenue, and compares that to the last three years, during which the airline has averaged nearly $5 billion a year in pre-tax revenue.
According to Parker, the industry is in a “profoundly different” place than it was only a few years back, and all those concerns about hoping to just break even while vacillating between profitable years and money-losing years are “arguably irrelevant… that is not who we are anymore.”
The CEO did admit that his is a “cyclical business. There will be good and bad years.” But in his mind, he believes that having a “lesser” year would mean around $3 billion in profit, while “great” years would amount to around $7 billion in profit.
Whether or not the U.S. airline industry is truly locked into a profitable future remains to be seen, but the way carriers make money has certainly changed in recent years, with much of an airline’s revenue coming not from ticket sales but from ancillary fees and deals with credit card companies.
A recent report from the Government Accountability Office calculated that U.S. carriers are now making $7.1 billion per year on fees for checked bags and ticket changes.
With regarding to American Airlines, the Bureau of Transportation Statistics says the carrier brought in more than $1.1 billion in baggages fees in 2016, more than $200 million above any other airline’s bag fee revenue. AA has already earned nearly $600 million from these fees in the first half of 2017; again, more than any other airline.
So between just those two fees — and not counting any other add-ons a passenger might pay for — American is looking at north of $2 billion per year; about 40% of its average annual revenue since the U.S. Airways merger.
Then there are the deals that airlines make with banks and credit card companies for rewards miles. The carriers don’t just give those miles away for free; rather, they charge a few cents each, and those pennies add up with bigger banks buying billions of miles each month, to the point where some airlines may now be making more money from selling miles than they are from selling tickets. And while unused miles are technically an accounting liability for an airline, the money made from selling these miles in bulk is far more than the actual value of the mile when it’s ultimately cashed in.