Senior Airline Expert: “The Numbers Don't Lie, But They Don't Tell the Whole Story Either"

Our guest has spent over two decades analyzing airline balance sheets, advising institutional investors, national publications and watching carriers rise and fall. They agreed to speak candidly on the condition of anonymity so they could say what they really thought without the constraints of their organization. 

Q: Airlines keep posting record or near-record profits, yet every earnings call is full of talk about "discipline"; capacity discipline, cost discipline, capital discipline. Why the constant refrain when things are going well?

A: That’s an interesting question and in the most simple terms it’s because the good times are exactly when airlines trip up. That's not a theory, it's a pattern you can trace through every cycle this industry has been through. When profits are strong, the instinct is to grow, to add routes, order aircraft, chase market share. For a while it works because demand is absorbing the extra supply, but airlines don't sell a product you can put on a shelf. Every seat that flies empty is revenue that's gone forever. So when three or four carriers all decide to grow into the same market at the same time, you get a supply glut, fares collapse, and suddenly those shiny new aircraft are burning cash instead of earning it.

The “discipline” language is a message aimed at Wall Street. By using the term discipline, senior airline management are reassuring shareholders that they won’t repeat old mistakes even if their financial performance is currently good. The other thing people don't always appreciate is that airline profitability, even during the good stretches, is thin compared to most industries. A carrier posting a 10 or 12 percent operating margin is having an outstanding year. A software company posting those numbers would be considered a disappointment. So there's much less room for error than people assume and that’s why discipline is so important.

Q: What do airline employees most commonly misunderstand about their company's financial position?

A: The biggest one is the assumption that high revenue means the company is swimming in money. An airline can bring in $50 billion in revenue and still be in a precarious financial position if its costs are $49 billion and it's sitting on $30 billion in debt. Revenue is not profit. Profit is not cash flow. And cash flow is not the same thing as having money to spend.

The second misunderstanding is about where the money goes. Employees sometimes see the profit number in a headline and think, reasonably enough, “Where's my share?” but they often don't see the full picture of obligations. Debt repayments, aircraft lease commitments, pension funding, capital expenditures to keep the fleet modern and competitive, these aren't optional. An airline that skips fleet renewal to pay bigger employee bonuses today is an airline that's going to be flying older, less fuel-efficient planes five years from now, and that's a death sentence. This is even before you consider how airlines are trying to make aircraft and the fuel more sustainable to fit into a low carbon world. 

I'd also add that employees sometimes underestimate how volatile the business really is. A pilot or a flight attendant might look at three good years and think the company is permanently fixed but fuel prices can spike 40 percent in six months through an unprecedented war; a recession can cut premium travel overnight; and a global infectious health crisis can ground an entire fleet. These are not far-fetched scenarios and all happened in the space of the last five years. The people running these companies aren't being stingy for the sake of it but rather they are trying to build enough of a cushion to survive the next shock because it’s not an ‘if’ but ‘when’.

Q: At what point do employee compensation gains become unsustainable for an airline?

A: This is the question everyone wants a simple answer to, and there isn't one. It depends on the carrier, its cost structure, its revenue mix, and what's happening in the broader economy. But I can give you some guideposts.

Labor is typically somewhere between 25 and 35 percent of an airline's total operating costs. When that number starts creeping toward the higher end, or above it, you need revenue to keep pace. If it doesn't, margins compress, and then you're in trouble. The math isn't complicated, it's just unforgiving.

What I watch closely is what I'd call the ‘all-in’ cost trajectory. It's not just the hourly rate. It's the overtime provisions, the retirement contributions, the healthcare costs, the work rule changes that affect productivity. A contract might look manageable on the headline wage number but contain scheduling provisions that effectively require you to hire 15 percent more staff to operate the same number of flights. That's where unsustainability tends to creep in. 

Q: What financial signals worry analysts even when an airline appears to be doing well?

A: Several things keep me up at night even when the headlines are positive.

First, rising unit costs that aren't matched by rising unit revenue. This is the canary in the coal mine. If it costs you more to fly each seat each mile but you're not earning more from it, your margins are shrinking even if your total profit still looks healthy. By the time that shows up as a problem in the headline numbers, you're often already a year or two into a structural issue.

Second, balance sheet leverage. Some airlines came out of the pandemic with enormous debt loads. They've been paying it down, but slowly. High debt is manageable when interest rates are low and revenue is strong. But it becomes a crisis fast when either of those things changes. I pay close attention to the ratio between what an airline owes and what it earns before interest and taxes. If that ratio isn't improving, I get nervous regardless of what the profit line says.

Third, fleet age and capital commitments. Airlines have to keep investing in new aircraft or they fall behind on fuel efficiency, passenger experience, sustainability, and maintenance costs. But those investments are enormously expensive and often financed with debt. When I see a carrier deferring deliveries or extending the life of older planes beyond what's optimal, I read that as a sign they're prioritizing short-term cash flow over long-term competitiveness.

Fourth, market concentration risk. An airline that's making great money because it dominates a few key hubs looks strong right now. But if a low-cost competitor decides to enter those markets, or if a regulatory change opens the door to more competition, that dominance can erode quickly.

And fifth, honestly, overconfidence. When management stops talking about risks on earnings calls and starts talking exclusively about how great everything is, that's usually the top of the cycle.

Q: Which airlines are managing costs best right now, and why?

A: I'm going to be somewhat general here because I don't want to turn this into a stock recommendation, but I can point to a trend I have seen over the past two decades. 

The standout performers tend to share a few characteristics. They have fleet strategies built around fuel efficiency; fewer aircraft types, newer planes, and the discipline to retire older equipment even when demand would let them keep flying it. Every generation of aircraft is roughly 15 to 20 percent more fuel-efficient than the one it replaces, and fuel is still one of the biggest variable costs in the business. The carriers investing in modern, standardized fleets are building a structural cost advantage that compounds over time.

This interview has been edited for length and clarity. If you would like to ask a direct question to our anonymous expert, don’t hesitate to reach out to george@ustransportnews.com