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businessEconomy

Airline profits poised for another high-flying year but potential hazards are on the radar

After a decade of bankruptcies and consolidation, low fuel prices and a strong economy have sent airline earnings soaring in recent years. Although the profits weren't as lofty as in 2015, airlines still turned in a strong financial performance in 2016.

After a decade of bankruptcies and consolidation, low fuel prices and a strong economy have sent airline earnings soaring in recent years. Although the profits weren't as lofty as in 2015, airlines still turned in a strong financial performance in 2016.

They'll face new challenges in 2017, as rising costs put pressure on airlines to make the most money possible from every passenger.

For now, trends are pointing in the right direction for another solid year, although uncertainty lingers about the possible impact of travel restrictions put in place by the Trump administration.

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Losing altitude

Airline profits backed off from the record heights of 2015, but airlines still booked billions of dollars in earnings in 2016. American and United saw the biggest drops from 2015, when they had multibillion-dollar income tax credits on their balance sheets.

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"The first real tailwind the industry has seen in awhile was American's fourth-quarter report and its projected first-quarter [revenue]. They forecast not only a continuing improvement but an accelerating improvement. That's a real significant turn if it turns out to be more than a two-hit wonder. What will be interesting to see is when American does roll out basic economy [fares], does it make things better? So far they've been competing without that tool, but I think with it they'll actually do better."

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Air traffic control

Low fuel prices spurred airlines to expand their networks in recent years as they battled for market share. But the increase in the supply of seats outpaced customer demand and pushed down fares, a trend airlines hope to reverse as they slow their rate of growth heading into 2017.

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"2017 has the potential to be a good year. There are a couple of things I'm looking at in particular. One is fuel; it's always an important factor and it's been trending up. The other thing I'm looking at, now that there is labor peace, that's a good thing, but it's come at a price. These contracts are going to probably send labor costs up 3 percent to 4 percent, maybe a little more depending on the airline. Those higher costs have to be paid for."

Costs creeping up

Low fuel prices continued to boost airline earnings in 2016, but the outlook is decidely more mixed for 2017. Fuel prices are projected to rise, and airlines will also have the added expense of raises and bonuses handed out to employees in 2016.

"Airlines will be looking to offset rising costs with higher revenues in 2017. While new offerings like no-frills basic economy fares and the not-quite-business-class premium economy seating will help, the bottom line is passengers could end up paying more for airfares after several years of price drops. At the very least, getting the cheapest fares in 2017 will likely mean going without amenities like carry-on bags or pre-assigned seats."

Stock market turbulence

Airline stocks took investors for a ride in 2016, with lower fares and uncertainty in foreign markets sending industry share values down nearly 14 percent through the first half of the year, according to Bloomberg's weighted index of publicly traded airlines. But with improving revenue trends and a post-election bump, share prices rallied to finish the year up 25 percent.

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