Fuel costs relative to competitors
China Eastern Airlines’s (CEA) fuel costs as a percentage of total costs declined from 37% in FY09 to 34% in FY13. For China Southern (ZNH), the company’s largest competitor in the domestic market, fuel costs comprised 36% of the total costs, higher than China Eastern’s, while employee costs were lower compared to China Eastern.
For major US airlines, including United Continental Holdings (UAL), Alaska Air Group (ALK), JetBlue Airways Corporation (JBLU), and Southwest Airlines (LUV), fuel costs were around 34% to 35% of total expense in FY13. Only Delta Air Lines (DAL) managed to keep fuel costs lower than its peers, with its fuel cost comprising only ~28% of the total cost.
Brazilian and US airlines
However, airlines in Brazil incur even higher fuel costs due to the currency impact. For further details on the impact of currency fluctuation on Brazilian airline fuel costs, refer to Fuel costs put Brazilian airlines at a competitive disadvantage.
However, Chinese airlines have an advantage of having lower employee costs compared to their counterparts in the US. Operational efficiency of US airlines are comparatively higher. In FY13, the average operating margin of major US airlines was ~8%. These airlines include Delta Air Lines, (DAL), United Continental Holdings (UAL), Alaska Air Group (ALK), American Airlines (AAL), and Southwest Airlines (LUV).
The rising profitability of US airlines have pushed up share prices, increasing returns generated from transportation ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN) that hold 30% to 40% in US airlines.