Moody's: US airlines to have temporary windfall from cheaper fuel, capacity discipline

US airlines can expect strong growth in profitability and improvements in return on invested capital (ROIC) in 2015, says Moody's Investors Service. Maintaining capacity discipline while the cost of fuel is low will drive the better performance.

"We expect companies to hold the line on capacity rather than use their fuel cost savings to pursue market share gains," says Jonathan Root, a Moody's Vice President - Senior Credit Officer, in the report "US Airlines: Cheaper Fuel, Capacity Discipline to Drive Sharp ROIC Improvement."

Because Moody's expects fuel prices to rebound in 2016, the jumps in profitability and ROIC will not be sustained long enough for significant improvement in the industry's fundamental credit quality.

"The dramatic increase in ROIC this year is likely to be a temporary windfall, rather than the new normal," says Root.

Among the four largest US carriers, Southwest will have the strongest ROIC in 2015, under both Moody's base case median fuel price assumption of $2.07 per gallon and its higher fuel price scenario of $3 per gallon. Under the $3 per gallon scenario, American would be the only one of the four airlines to see a modest decline in ROIC from its 2014 level.

Under the base case, Southwest, Delta Air Lines Inc. and United Continental Holdings Inc. easily exceed their respective ROIC targets, which are more than 15%, 15%-18% and 10%, respectively. American Airlines Group Inc. hasn't defined a specific target.

US airlines will continue to follow the playbook they have had in place since the 2008 financial crisis, says Moody's, which is to manage capacity to help reach or surpass targeted ROIC levels.

"With steady demand, limited capacity growth and low fuel prices, we believe the environment is ripe for the US airlines to ring up strong ROICs well above their targets," says Root.