By Rajesh Kumar Singh
CHICAGO (Reuters) – A reduction in airline seats in the domestic market that is fueling U.S. airline earnings is here to stay, United Airlines CEO Scott Kirby said on Wednesday.
A sharp pullback in flying by U.S. carriers since summer has driven up ticket prices, helping them mitigate rising costs and shoring up the industry’s outlook.
Those conditions helped United smash Wall Street estimates in the fourth quarter and forecast stronger profit in the current quarter. Two weeks ago, rival Delta Air Lines also offered an upbeat outlook, calling the industry’s restraint in adding seats a “constructive” backdrop.
Kirby said high operating costs at airports in New York, Chicago, Los Angeles and San Francisco have priced out low-cost airlines, making them focus on markets where they have a competitive advantage and putting a lid on unprofitable flying.
“It really is a transformed industry,” he told analysts on an earnings call.
Annual domestic seat growth this year is estimated to be the slowest in at least a decade. Tight supply and strong travel demand led to the fastest pace of airfare increases in 21 months in December.
Carriers’ discipline in adding seats has turned analysts and investors sanguine about the industry.
The NYSE Arca Airline index has gained 36% in the past six months, outpacing a 9% jump in the S&P 500 index. United’s stock has surged 126% during the same period.
Analysts liken the trend to the run U.S. airlines had from 2012 to 2014, when low growth propelled their operating margins to over 11% in 2014 from under 6% in 2012, sparking a 300% rally in airline stocks.
A shortage of aircraft due to production and engine delays has also put a cap on the industry’s growth plans. Kirby said the availability of wide-body jets has become a greater challenge and is expected to last at least through the end of this decade.
“The international environment … is going to be far stronger for longer,” he said.
(Reporting by Rajesh Kumar Singh; Editing by Rod Nickel)
