Image Courtesy of Alaska Airlines

MIAMI – Week 3 of U.S. airline earnings for the first quarter of 2017 (Q1 2017) is in the books, with six additional carriers reporting earnings after Hawaiian, Delta, and United had done so over the previous two weeks.

American Airlines, Southwest Airlines, Alaska Airlines, Spirit Airlines, Allegiant Air, and JetBlue Airways all recorded net profits for the period, traditionally the weakest for U.S. airlines (Q3 or the summer is the strongest), but saw mixed revenue performance.

This report will be split into two. Part 1 today will cover American, Southwest, and Alaska, while Part 2 will cover Spirit, Allegiant, and JetBlue. Here are eight takeaways from Q1 2017 earnings for American, Southwest, and Alaska.

The Numbers


  • Revenue up 2.0% to $9.62 billion
  • Operating expenses up 11.4% to $9.02 billion
    • Wages and salaries up 6.5% to $2.83 billion
    • Fuel expenses up 36.2% to $1.40 billion
  • Operating profit down 55.0% to $601 million
    • Operating margin of 6.2% vs. 14.1% in Q1 2016
    • Net Profit down 66.6% to $234 million
  • Capacity (ASMs) down 1.1% YOY
    • Unit Revenue (PRASM) up 2.0% YOY to 12.67 cents
    • Unit Cost (CASM) up 12.6% to 14.02 cents
    • Unit Cost (CASM) excluding fuel up 7.6% to 11.16 cents


  • Revenue up 1.2% to $4.88 billion
  • Operating expenses up 8.8% to $4.23 billion
    • Wages and salaries up 12.6% to $1.73 billion
    • Fuel expenses up 8.2% to $922 million
  • Operating profit down 30.3% to $658 million
    • Operating margin of 13.5% vs. 19.6% in Q1 2016
    • Net Profit down 31.6% to $351 million
  • Capacity (ASMs) up 4.1% YOY
    • Unit Revenue (PRASM) down 3.3% YOY to 12.06 cents
    • Unit Cost (CASM) up 4.5% to 11.51 cents
    • Unit Cost (CASM) excluding fuel up 4.8% to 9.00 cents


Virgin America’s Q1 2016 results are rolled into the year-over-year (YOY) comparisons

  • Revenue up 1.5% to $1.75 billion
  • Operating expenses up 14.0% to $1.58 billion
    • Wages and salaries up 7.9% to $448 million
    • Fuel expenses up 42.4% to $922 million
  • Operating profit down 30.3% to $658 million
    • Operating margin of 13.5% vs. 19.6% in Q1 2016
    • Net Profit down 31.6% to $351 million
  • Capacity (ASMs) up 4.9% YOY
    • Unit Revenue (PRASM) down 3.3% YOY to 10.31cents
    • Unit Cost (CASM) up 8.7% to 11.00 cents
    • Unit Cost (CASM) excluding fuel up 0.1% to 8.37 cents

American grew PRASM and…. saw its profits collapse

Let me get this straight. American cut capacity by 1.1% YOY, below (admittedly anemic) GDP growth of 0.7% in Q1 2017 and PRASM grew by a whopping 2.0%.

According to Wall Street’s grand unified theory of unit revenues, this should have led to expanded margins and profits…. The numbers speak for themselves. At this point, I’d embed a bunch of iPhone clapping emojis into the story if I weren’t doubled over laughing at the irony.

Airways readers and listeners of the Airways Podcast know my thoughts about PRASM and capacity growth and Wall Street’s position on it. Conversely Wall Street is right about the wage increase that American just handed out, but more on that in a separate piece later this week

Miami’s re-banking helps offset South Florida capacity growth from Southwest and JetBlue

Over the past five years, a three-way battle between incumbent Spirit Airlines and leisure oriented Southwest and JetBlue has driven a surge of low fare capacity at Fort Lauderdale, the second busiest airport in the South Florida metropolis encompassing Miami, Fort Lauderdale, and West Palm Beach.

Miami International Airport, home to one of American’s largest hubs has historically been the dominant airport in the South Florida metropolis thanks to its proximity to both the lions share of high-yielding business traffic and the ethnic Latin American population that powers its long and medium haul flights to Latin destinations (one of the sources of its power as a hub).

But the surge of low fare offerings has drawn more and more domestic (and some international) leisure travelers to Fort Lauderdale, which has seen close to 8 million new seats added between 2010 and the present (2016 witnessed record annual traffic of 29.2 million passengers). Fort Lauderdale’s growth is undoubtedly hurting American’s origin and destination (O&D) traffic volumes, even if the highest yielding customers still prefer Miami International.

The re-banking project at Miami should more than offset that volume loss by facilitating more connections and better-utilizing assets. Combined with the YOY improvements in Latin America (albeit from a very low base), Miami’s hub profitability should remain stable despite the massive increase in competitive capacity down the road.

Basic Economy may be solving one of the greatest paradoxes in the U.S. airline industry

The a-la-carte, fee-based model for economy class passengers in the United States has angered passengers for more than a decade. But its adoption by nearly every U.S. airline is not driven by some masochistic desire to make passengers’ lives miserable. Instead, it is driven by the behavior of customers themselves – passengers always choose the lowest base fare in competitive markets, regardless of the added fees that will be charged.

This has created a catch-22 for large U.S. airlines – either they can adopt a fully a-la-carte model and make passengers angry, or they can lose money when passengers choose lower priced alternatives with a-la-carte pricing.

Basic Economy fares might offer the solution, as they leverage better reservations system and website technology to finally shine the light on what customers are trading off to get the lowest possible fare (matching the ULCCs).

Obviously, it is very early in the rollout, and these are small sample sizes, but in the ten launch markets for Basic Economy, half of eligible Basic Economy passengers have upgraded to higher priced bundles. Passengers complain all the time that they’d be willing to pay modestly higher prices for a better product – now they have that option.

Downgauging La Guardia and Washington Reagan was the right move

First of all, the move to downgauge the Love Field to Washington Reagan and New York La Guardia routes made a ton of sense – those routes were losing buckets of money based on DOT data.

For political reasons, Alaska can’t walk away from the Love Field gates or those slots at Reagan and La Guardia (access to those assets was sold as a pro-competitive piece of the merger), so at the very least flying regional jets on the two East Coast routes and adding more West Coast service will minimize losses.

With the American Airlines codeshare diminished in importance post-merger, Dallas-Fort Worth may no longer be the most preferred airport in the Metroplex for all of Alaska’s flights.

Alaska’s merger integration is continuing apace – $10-15 million incremental revenues on the table in ex-Virgin markets

There are a lot of positive signs on the merger integration. Airport operations at Seattle, Portland, San Francisco, Los Angeles, Newark, and New York JFK will all be consolidated by year’s end, and Alaska has announced a ton of growth to smaller cities from ex-Virgin hubs.

Meanwhile, the loyalty programs are combining very quickly, with conversions from Elevate powering MileagePlan to its highest ever levels of growth in California and nationwide. On the seemingly more mundane but functionally more important side, Alaska finished bringing three years of Virgin America bookings history into Alaska’s Sabre reservations system.

This doesn’t seem like a big deal, but it will empower Alaska’s excellent revenue management team to squeeze more profitability out of ex-Virgin America markets. I’d estimate that this could generate $10-15 million in incremental revenue for Alaska over the next 3-5 years.

Southwest is paying $40 million to generate hundreds of millions in incremental earnings

This is going to be a shocking statement (and perhaps geopolitics will make me look like an idiot) but the single most important long-run development in the US airline industry in 2017 will be the rollout of Southwest’s new reservations system.

Whether it’s enabling more international flying to places like Canada (or one day South America) or allowing Southwest to finally match its US airline peers with day-of-week schedule flexibility, there are hundreds of millions of dollars worth of incremental or new revenue that will be supported by the new reservations system.

Southwest spent $40 million in incremental costs on rolling that out in Q1 2017, but it is worth every penny.

Southwest isn’t going to overbook anymore

Here’s Southwest CEO Gary Kelly on the earnings call:

The issue is the economic effect. As time has gone by, we have been fortunate to have fewer and fewer and fewer no-shows. So the gross amount of the problem is far less today than it was 20 years ago. We don’t overbook much at all already. My recollection, Bob, is that it’s about, on a 143-seat airplane, we might overbook by 1.

And it’s hard to generalize but it at least gives you some frame of reference. This isn’t a vast issue. And we don’t – I never get complaints from our customers about overbooking. I get complaints about any other variety of things. I’m not saying there aren’t complaints, and don’t get me wrong. But it’s just not an issue the way the company has been managing that, and I’m very proud of our folks who are doing that…

One of the other questions I got, Conor, this morning, which might help put it in perspective, well, isn’t this going to cost you money? Well, what we’re trying to do is be the world’s most loved airline. And we feel like just putting this in with no change fees, no bag fees, no overbooking, that’s who we are. And we’re at a point now where we can do all of that and still stay true to our low-fare brand.

It will come as no shock to frequent readers that I don’t love this decision – I think overbooking is good for airlines and consumers. But Southwest clearly isn’t getting a ton of benefit from it, and it wants to be “the world’s most loved airline.”

But if Southwest wants to be “liked” more by its customers, this is a good way of doing it.