U.S. airlines are heading into 2015 with a profitable year behind them, along with a strong tailwind in the form of continuing low fuel prices, admirable self-discipline and a group of low-cost carriers that are becoming less disruptive to the market as they mature.
The cost of fuel, which averages about 30% of airline operating costs, hit a five-year low in early December, dipping below $60 a barrel. That's a far cry from 2008, when fuel approached $150 a barrel, pushing airlines to start charging passengers for checked bags, the start of a new revenue stream in the form of ancillary services.
This year, ancillaries totaled nearly $50 billion, according to one industry estimate, although nearly half of the ancillaries counted were for nonairline services, such as the sale of frequent flyer miles to co-branded credit cards and commissions earned on hotel and car rental bookings.
Airline analyst Robert Mann said that low fuel prices are not just good for airlines' bottom lines; they also mean consumers have more money for discretionary spending.
"Energy is a huge, regressive tax," Mann said. "It hits everyone, and it is indiscriminate."
With current drops in the cost of fuel, consumers are spending about $10 less each time they put 20 gallons of fuel into their cars and $180 less every time they fill a 375-gallon heating tank in their home.
That, Mann said, should stimulate consumer demand, some of which will no doubt apply to air travel.
At the same time, U.S. airlines are not letting low fuel prices go to their heads. They continue to practice impressive self-discipline when it comes to managing capacity. With few exceptions, North American carriers are increasing capacity only minimally. Available seat miles, a major measure of airline capacity, is plateauing, actually decreasing or increasing by mere tenths of a percent.
Although it sometimes might look as though airlines are adding routes and seats, in reality they are doing so in a very limited fashion.
Airlines are pulling aircraft off less profitable routes and moving them to routes that make more money. Or they are adding more seats to planes already in service.
At the same time, Southwest Airlines, once the market's greatest disrupter, is now more like the legacy carriers. For one thing, said aviation analyst Darryl Jenkins, it is a price leader, "pushing through price increase after price increase."
Moreover, it's a more complex carrier than it once was because it has an aging and more expensive workforce; it has absorbed a second carrier, AirTran; and it is beginning to offer international routes. And like the legacy carriers, it is now running into labor problems. Unions representing pilots, machinists and res agents have all asked the National Mediation Board for help in contract negotiations, and pilot contracts are still being negotiated.
Taken all together, this means airlines can keep their planes flying full and increase fares at least slightly. The American Express Global Business Travel Forecast 2015 predicts that an improving economy, greater corporate confidence, U.S. carriers' continued ability to hold capacity steady and industry consolidation mean airlines probably will raise their long- and short-haul fares.
But there's one wildcard: the ultralow-cost carriers, which, while small, are ambitious and profitable.
Spirit Airlines and Allegiant Air are two examples of rapidly growing ultralow-cost carriers. Spirit's available seat miles increased 18% from October 2013 to October 2014, while Allegiant's were up 11%.
"The reason they're doing it is very simple," said industry analyst Henry Harteveldt. "There's market demand for their product."
At least one major airline has taken notice. Delta Air Lines took a page from Spirit's playbook when it expanded its bare-bones Basic Economy fare in the fall. Mann said that the stripped-down fare -- passengers purchase a ticket for a flight, but they can't pick their seat or buy an upgrade -- is a direct response to Spirit's cheap fares.
Delta began quietly testing the Basic Economy fare on a few routes in March 2012. This fall, it expanded it to more cities, mostly those originating in Atlanta, Detroit and Minneapolis to leisure destinations.
Delta has essentially unbundled its pricing to provide a Spirit-like fare. Spirit has some of the most densely packed planes in the sky, with seats at a mere 28-inch seat pitch, compared with Delta's relatively spacious 31-inch pitch, according to Routehappy, which quantifies the quality of in-flight experiences.
Spirit is not going to pose a challenge to Delta. The ultralow-cost carrier was flying fewer than 60 planes when Delta, a behemoth with 700 aircraft, broadened its Basic Economy fare.
But Mann pointed out that Spirit has a big order book. The carrier has said it expects to add six more planes to its fleet by the end of 2014, 15 planes in 2015 and 16 in 2016. By the end of 2021, it expects to have 144 planes in its fleet, according to its spokesman, Paul Berry.
Even more tantalizing is the fact that Frontier Airlines is morphing into an ultralow-cost carrier itself under the guidance of Frontier Chairman Bill Franke, a former chairman of Spirit.
Should those two carriers, which have complementary route networks, merge, as is frequently speculated, they would move from being regional players to a national carrier.
And that, Mann said, would bring some "real price discipline" back into the market.