The surge in summer air travel demand has not translated into record profits for American airlines. Operators will have to take responsibility for this disconnect when they release their quarterly earnings this month. Some airlines predict record demand and, in some cases, record revenues. However, higher labor and other costs have eroded airline profits. To adapt to slower demand growth and other challenges, some airlines have slowed down their hiring pace, compared to the recruitment boom during the post-pandemic recovery. Some airlines are facing delays in the delivery of new, more fuel-efficient aircraft from Airbus and Boeing, while engine recalls from Pratt & Whitney have resulted in dozens of grounded planes.
However, according to data from aviation data company OAG, US airline capacity has increased, with July seat capacity up by about 6% compared to July 2023. This expansion is keeping ticket prices in check, and the industry’s stocks have lagged behind the market. The ARCA Airline index, tracking 16 major US airlines, has fallen nearly 19% this year, while the S&P 500 index has risen over 16%.
“Murky as mud”
In a report on Friday, Raymond James analyst Savanthi Syth described the airline industry’s third-quarter outlook as “murky as mud,” citing several unfavorable factors such as potential weakening of coach passenger spending, the impact of the Paris Olympics on some European bookings, and potential changes in corporate travel demand.
In addition, some travelers have chosen to travel in late spring and early summer, raising doubts about demand later in the summer. Investors will gain more insight into the traditionally slower late summer and the rest of the year when airlines report their quarterly earnings, starting with Delta Air Lines on Thursday. Analysts believe Delta Air Lines is one of the best performers, largely due to the airline’s success in marketing more expensive premium seats and a lucrative agreement with American Express. In April this year, Delta Air Lines, the most profitable airline in the US, forecasted adjusted earnings per share of $2.20 to $2.50 for the second quarter, lower than the adjusted $2.68 per share in the same period last year. Delta Air Lines, along with its competitors United Airlines, will report next week. Alaska Airlines is the top pick for Wolfe Research airline analyst Scott Group. In a research note on June 28, Group said these three airlines have less profit risk and better free cash flow than other airlines. As of July 5, Delta Air Lines and United Airlines’ stocks have risen about 14% this year, outperforming the industry’s overall decline. Alaska’s stock is down about 2%.
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Cheaper fares
Airports have been bustling this summer. According to the Transportation Security Administration, nearly 3 million people passed through US airport checkpoints on June 23 alone, setting a new record. Airlines have been expanding their domestic and international flight schedules and lowering fares. According to consulting firm Airlines/Aircraft Projects, capacity between the US and Europe in July has grown by nearly 8% compared to a year ago, with new routes primarily targeting leisure travelers. According to a report from ticket tracking company Hopper in June, the average price for long-haul flights between the US and Europe this summer is $892, compared to $1,065 in summer 2023. According to the latest US inflation data, airfares in May were down nearly 6% year-on-year.
Lowered forecasts
Despite the increase in passenger numbers, some airlines have acknowledged that revenue has fallen below expectations due to the increase in flights. On May 28, American Airlines lowered its second-quarter revenue and profit forecast and announced the departure of its chief commercial officer following a backfire in its sales strategy. The next day, American Airlines CEO Robert Isom said at a Bernstein industry conference, “Domestic supply-demand imbalance has resulted in a weaker domestic pricing environment than we forecasted… There’s more discounting activity than there was a year ago. Now, industry capacity is expected to decrease in the second half of the year, and that should be helpful.”
Southwest Airlines also lowered its second-quarter forecast in late June, citing a change in demand patterns. The Dallas-based airline is under pressure to rapidly change its long-standing business model that does not include seat assignments and first-class service, as larger competitors like United Airlines and Delta Air Lines tout strong growth in premium cabins. The airline is also trying to fend off activist investor Elliott Investment Management, which disclosed a nearly $2 billion stake in the airline in June and called for a leadership change. Southwest CEO Bob Jordan discussed potential new revenue initiatives at a Politico-hosted industry event on June 12, saying, “We will adjust based on what our customers want.” Both American Airlines and Southwest Airlines will report their second-quarter earnings at the end of July.
Making changes
Some struggling airlines, such as JetBlue Airways and Frontier Airlines, have been making changes. JetBlue has been cutting unprofitable flights this year and ensuring that its aircraft equipped with its high-end Mint business class are on the right routes. Mint business class tickets are priced at more than four times the average long-haul bus ticket. Meanwhile, Frontier Airlines and fellow low-cost carrier Spirit Airlines have eliminated change fees for standard long-haul bus fares and above, a move that major legacy carriers took during the pandemic. Both low-cost airlines announced in May that they would start offering bundled fares, including seat assignments and other ancillary fees they used to charge. Spirit warned about 200 pilots last week that they could be furloughed this year, according to the pilots’ union. Spirit is grappling with the impact of a judge’s ruling that blocked its acquisition of Frontier Airlines and is the airline most affected by the grounding of Pratt & Whitney engines. At Spirit’s annual shareholders meeting in June, CEO Ted Christie dismissed rumors that Spirit was considering filing for Chapter 11 bankruptcy protection and said the company would repay over $1 billion in debt by September 2025.
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