Most of the top U.S. airlines experienced unit revenue declines in November, due to a calendar shift that pushed the Sunday and Monday following Thanksgiving (two extremely strong revenue days) into December. As a result, airline investors expected a strong bounce-back performance in December -- and the airlines delivered.


December Unit Revenue Change

December Capacity Change

American Airlines (NASDAQ:AAL)

Up 9.0%

Up 1.1%

Delta Air Lines (NYSE:DAL)

Up 10.0%

Up 3.8%

Southwest Airlines (NYSE:LUV)

Up 14.0%-15.0%

Up 3.4%

United Continental (NASDAQ:UAL)

Up 11.5%-12.5%

Up 0.5%

US Airways

Up 12.0%

Up 3.6%

Source: Airline press releases. 

A strong holiday season
Double-digit unit revenue gains were the norm last month in the airline industry, surprising even airline executives. United Continental's management stated, "The company's December PRASM growth was greater than originally expected due to strong yields and traffic throughout the month." Delta also recently updated its guidance, telling investors to expect a Q4 operating margin of 8%-9% (compared to 7%-9% previously).

Southwest Airlines saw a big December unit revenue gain due to strong leisure demand.

This revenue performance indicates that the airlines were able to capture the benefit of the Thanksgiving calendar shift last month, but also that holiday period demand was very strong overall. It is telling that Southwest -- which is more leisure-oriented than the legacy carriers -- had the best result in December, after having the worst unit revenue result in November. This suggests that leisure demand was particularly robust.

Averaging out
The Thanksgiving calendar shift makes it confusing to interpret the airlines' November and December performances individually. However, taking the average of the airlines' November and December unit revenue changes creates a rough approximation of their overall performance for the two-month period. This enables a more useful comparison.


Combined November and
December Unit Revenue Change (Estimate)

American Airlines

Up 4.5%-5.5%

Delta Air Lines

Up 3.0%-4.0%

Southwest Airlines

Up 4.0%-5.0%

United Continental

Up 4.5%-5.5%

US Airways

Up 3.5%-4.5%

Source: Airline press releases, author's calculations.

These averages show very consistent mid-single-digit unit revenue gains across all of the top carriers. Delta may have been slightly off the pace (probably due to its high exposure to the weak yen) but the "race" was still very close.

These unit revenue gains should allow significant margin expansion for all of the airlines when they report Q4 results later this month. Most of the airlines are expecting low-single-digit increases for non-fuel unit costs, and jet fuel prices were similar or even lower than in 2012 during November and December. Slow cost growth and faster revenue growth naturally leads to higher margins.

Foolish bottom line
After an artificially weak November, the airlines had an artificially strong December. However, looking at the combined period -- which compensates for the Thanksgiving calendar shift -- it is clear that America's top airlines are doing very well indeed. The major carriers should report big Q4 earnings growth, as unit revenue growth is outpacing unit cost increases.

Indeed, barring any unforeseen complications, the U.S. airline industry will have a very strong 2014. However, investors should try to remain levelheaded, as sector valuations have skyrocketed in the last year or so. Soaring industry profitability could entice low-cost carriers to return to rapid growth in 2015, pressuring the industry leaders once again.