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Airline employee costs rise, fuel costs decline

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Trend in airline fuel consumption, cost per gallon

According to the Bureau of Transportation Statistics (or BTS), in the first ten months of 2014, the US airline industry’s fuel consumption increased year-over-year by ~2%. The cost per gallon decreased to $2.69 in October 2014, a year-over-year decrease of ~10.4% and the lowest since January 2011.

On a year-to-date basis, the cost per gallon decreased by 3.29% to $2.94. This was primarily due to falling crude oil prices. Falling fuel prices will have a positive impact on transportation ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN).

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Higher employment

The second largest cost component for airlines after fuel cost, covers salaries, wages, and benefits. An increase in employment is positive, as it is a leading indicator of airline industry performance. Airlines employ more only when there is an increase in the number of scheduled flights or when capacity expands.

According to the Bureau of Transportation Statistics, there was a year-over-year increase in US scheduled passenger airline full-time employment for the 11th consecutive month in October 2014. Full-time equivalent (or FTE) employees increased by 0.9% year-over-year to 384,700 in October 2014. The network carriers employed two-thirds of the total employees.

All major US airlines, including Delta Air Lines (DAL), Alaska Air Group (ALK), American Airlines (AAL), JetBlue Airways (JBLU), and Southwest Airlines (LUV), reported a year-over-year increase in FTE count. Although United Continental (UAL) employed the highest number of FTEs among the network carriers, its FTEs decreased in October just as it did in September.

Labor is highly unionized in the US airline industry, leading to higher wages than non-US air carriers. Recently, airline profit-sharing expenses related to the employees increased substantially, as the profitability of major US airlines increased. Airlines use this as an incentive to align employee interests with company objectives.

Higher profitability of these stocks pushed up returns from ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN). Airline stocks comprise a major portion of the holdings of these ETFs.

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