Record demand for summer air travel does not translate into record profits for US airlines. Carriers will have to account for this disconnect when they report quarterly results this month.
Some airlines have predicted record demand, and in some cases, revenue. But high labor and other costs have weighed on the airline’s bottom line. To adjust to slower demand growth and other challenges, some operators have slowed if not stopped hiring compared to hiring sprees when they rebuilt after the pandemic.
And some airlines are facing delays to new, more fuel-efficient planes from Airbus and Boeing at the same time that a Pratt & Whitney engine recall has grounded dozens of planes.
However, US airlines have increased capacity, flying about 6% more destinations in July than in July 2023, according to aviation data firm OAG. The expansion is keeping airfares in check, and stocks in the sector have lagged behind the broader market.
The NYSE Arca Airline Index, which tracks 16 mostly US airlines, is down almost 19% this year, while the S&P 500 has advanced more than 16%.
‘Clear as mud’
What the third quarter will look like for airlines is “as clear as mud,” Raymond James analyst Savanthi Syth said in a note Friday, citing headwinds such as potentially weaker spending by coach-class clientele, the impact of the Paris Olympics on some reservations in Europe. and potential changes in demand for corporate travel.
Also, some travelers have opted for late spring and early summer trips, raising questions about late summer demand.
Investors will get more insight into the traditionally slower end of summer and the rest of the year when airlines report quarterly results, starting with Delta Air Lines on Thursday.
Analysts consider Delta the best of the bunch, largely thanks to the airline’s success in marketing more expensive, premium seats and its lucrative deal with American Express.
In April, Delta, America’s most profitable airline, forecast adjusted quarterly earnings of $2.20 to $2.50 per share for the second quarter, down from the $2.68 per share it brought in one year ago.
Delta, rival United Airlines, which reports next week, and Alaska Airlines are the top picks for Wolfe Research airline analyst Scott Group, which said in a June 28 research note that all three have less earnings risk and better cash flow than other carriers. .
Shares of Delta and United are each up about 14% this year through July 5, standing out in a sector that is largely down this year. Alaska shares are approx 2%.
Cheaper rates
Airports are bustling this summer. Nearly 3 million people, setting a record, passed through US airport checkpoints on June 23 alone, according to the Transportation Security Administration.
Airlines have expanded their schedules, both domestically and internationally, reducing fares. US-Europe capacity for July is up nearly 8% from a year ago, according to consulting firm Airline/Aircraft Projects, with new routes targeting mostly leisure travelers.
Fare-tracking company Hopper reported in June that summer flights between the US and Europe by coach were going for $892 on average, compared to $1,065 for summer 2023.
Airfare fell nearly 6% in May from a year earlier, according to the latest US inflation data.
Low forecasts
Despite higher passenger numbers, some carriers have admitted weaker-than-expected sales due to increased flights. American Airlines on May 28 lowered its second-quarter revenue and profit forecasts and announced that its chief commercial officer was leaving after a sales strategy failed.
“The imbalance of domestic supply and demand has led to a weaker domestic pricing environment than we had anticipated,” American Airlines CEO Robert Isom said at an industry conference at Bernstein the next day. “There is more discount activity than we saw a year ago. Now, industry capacity is expected to decrease in the second half of the year and that should help.”
Southwest Airlines cut its forecast for the second quarter in late June, citing changing demand patterns. The Dallas-based airline is under pressure to quickly change its profitable business model — which has no seat assignments and one class of service — as major rivals such as United and Delta seek strong growth from premium cabins.
The airline is 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.
“We will adapt as our customers’ needs adapt,” Southwest CEO Bob Jordan said at an industry event hosted by Politico on June 12, discussing potential new revenue initiatives.
Both American and Southwest report second-quarter results toward the end of July.
Making changes
Some money-losing carriers, such as JetBlue Airways and Frontier Airlines, are already making changes.
JetBlue has cut back on unprofitable flights this year and is making sure planes equipped with its premium Mint business cabin, where tickets can go for more than four times the bus fare, are on the right routes.
Meanwhile, Frontier Airlines and its discount carrier Spirit Airlines have waived change fees for standard coach tickets and above, following the carrier’s biggest, legacy move during the pandemic. Both budget airlines announced in May that they would begin offering bundled fares to include seat assignments and other extras they paid for.
Spirit, which is struggling with the fallout from a judge’s ruling that blocked JetBlue from buying the airline and is the most affected by the Pratt engine ban, last week warned about 200 pilots they could be laid off this year, according to the pilots’ union.
At Spirit’s annual shareholder meeting in June, CEO Ted Christie dismissed suggestions that Spirit is considering filing for Chapter 11 bankruptcy protection, with a debt payment of more than $1 billion due in September 2025.