Despite Record Profits, Turbulence Ahead For The Airline Industry

The U.S. airline industry has a lot going for itself right now. Cheap fuel, customers with more disposable income and better management practices are all contributing to a successful year with record profits for most big name carriers. However, that hasn't helped boost share prices, as many analysts have been looking critically at the industry and forecasting trouble ahead.

More Cash

The nation's top three airlines, American Airlines Group Inc AAL, Delta Air Lines, Inc. DAL and United Continental Holdings Inc UAL are all on track to generate billions of dollars in profit in 2015.

They have all benefitted from lower fuel costs and tighter management strategies. The excess cash has pushed all three to buy back stocks and invest in the future; American plans to refresh its fleet, Continental is working to overcome structural problems and Delta hopes to pay off its debt and pension obligations.

Related Link: Airline Survey Results Are In: Negative EPS Revisions Might Have Bottomed

More Money More Problems

However, their improving balance sheets aren't the only things investors are looking at. Airline employees who've seen the record profits coming in are beginning to complain about pay rises. Both Southwest Airlines Co LUV and Delta Airlines are currently struggling with employees who say their contracts don't reflect the airlines' financial successes.

Lower Costs

A drop in ticket prices has also been a cause for concern among traders. While U.S. airlines have been transporting more passengers than ever this year, their fares have also declined significantly.

That means that each airline's unit revenue has fallen, a metric that investors find extremely useful in predicting profitability. Unit revenue takes into account how much an airline makes per customer per mile, and that figure has been disappointing so far in 2015 and isn't expected to improve in 2016.

Overdone?

While many are worried about the future of the airline industry, some say that fear is overdone. Because air travel companies were one of the hardest hit industries during the financial crisis, there is a lot of skepticism about the sector. Some analysts believe that now could be the time to buy airline stocks, as their valuations are low and don't reflect the reality of the industry's health.

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