When gridlock in Washington, D.C., caused the federal government to shut down non-essential functions earlier this month, it was inevitable that airlines would be part of the collateral damage. Government-related travel represents a modest, but still significant, portion of revenue for many airlines. Moreover, uncertainty damages business confidence, dampening travel spending among high-margin corporate clients.
Most of the top U.S. airlines reported Q3 earnings last week. On their earnings calls, they provided a glimpse into how much the shutdown hurt them. United Continental (NYSE: UAL ) , Delta Air Lines (NYSE: DAL ) , Southwest Airlines (NYSE: LUV ) , and US Airways (NYSE: LCC ) all specifically stated that the shutdown had reduced travel demand in October.
Every airline with a broad network appears to have been affected, but airlines with major operations in the D.C. area were the hardest hit. Fortunately, though, demand seems to have recovered quickly to previous levels after the shutdown ended.
The worst hit
United, Delta, Southwest, and US Airways each lost tens of millions of dollars in revenue despite the shutdown's short duration. US Airways is the smallest of these carriers, but it was the worst hit because it runs a hub at Washington's Reagan National Airport.
Reagan National is by far the closest airport to Washington D.C. and major government offices in Virginia such as the Pentagon. As a result, it is the preferred D.C.-area airport for most business and government travelers.
US Airways President Scott Kirby described the severe impact of the shutdown on his company last week. In the first two weeks of October, last-minute bookings for the D.C.-area airports plummeted 54%. Total government-booked revenue dropped 57% in that same period. US Airways saw more modest impacts elsewhere in its system, but the shutdown still depressed October unit revenue by an estimated 3%-4%.
Major impact on D.C.
The geographical concentration of the damage can also be seen by comparing the projections of United and Delta. Whereas US Airways has a disproportionately high exposure to the D.C. air travel market, United and Delta are geographically diversified. Still, United operates a hub at Washington's Dulles Airport, whereas Delta has a smaller footprint in the D.C. area.
As a result, United appears to have seen a somewhat larger impact from the shutdown than Delta. On its recent earnings call, United Vice Chairman Jim Compton stated that the shutdown would depress October unit revenue by 1.5%. By contrast, Delta President Ed Bastian pegged the impact at $25 million, which would imply an approximately 1% cut to unit revenue.
Southwest Airlines is also geographically diversified, but it operates one of its largest focus cities at Baltimore-Washington International Airport: the third D.C.-area airport. Southwest reported a $20 million impact from the shutdown, which equates to a roughly 1.5% reduction to unit revenue. That's right in line with the figure United cited.
The shutdown's impact on U.S. airlines will thus vary between carriers depending on their exposure to business and government traffic, particularly in the D.C. area. At Delta, the shutdown will reduce Q4 margins by less than half of a percentage point, whereas US Airways could see a full 1-percentage-point reduction in its Q4 pre-tax margin. Given the low-margin nature of the airline industry, this will have a significant impact on these companies' Q4 earnings.
The only redeeming factor in this mess for the airlines is that the shutdown lasted for less than three weeks, and demand jumped back to pre-shutdown levels immediately following the end of the shutdown. The shutdown will still be a drag on Q4 airline earnings, but there should be no longer-term impact.
However, that doesn't mean the risk of government gridlock has ended. The current funding bill runs out on Jan. 15, which is less than three months from now. If Congress is unable to agree upon a budget compromise by then, another partial shutdown could occur then, creating another month (or more) of disruption for the airline industry.
The safest airline investments
Government meddling is just one of the many potential pitfalls for airlines. But two airlines may have made it through the shutdown unscathed. These companies are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!