Despite record demand, airline profits are falling

Record summer demand for air travel shouldn’t be translating into record profits for U.S. airlines, and the airlines may have to reply for that discrepancy once they report their quarterly results this month.

Some airlines have forecast record demand and, in some cases, record revenue. On Sunday, the Transportation Security Administration screened greater than three million people – a single-day record.

But higher labor and other costs have eaten into airlines' profits. To adapt to slower demand growth and other challenges, some airlines have slowed and even stopped hiring altogether, in comparison with the huge hiring they’d in the course of the post-pandemic rebuild.

And some airlines have faced delays within the delivery of recent, more fuel-efficient aircraft from Airbus and Boeing at the identical time that a Pratt & Whitney An engine recall has put dozens of jets out of motion.

Still, U.S. airlines have increased capability, offering about 6% more seats in July than they are going to in July 2023, based on aviation data firm OAG. The expansion is keeping airfares in check, and the sector's stocks have lagged the broader market.

The NYSE Arca Airline Index, which covers 16 predominantly US airlines, has fallen by almost 19% this yr, while the S&P500 has increased by greater than 16%.

What the third quarter will appear like for airlines is “as clear as mud,” Raymond James analyst Savanthi Syth said in a note on Friday, citing headwinds equivalent to potentially lower spending by economy class guests, the impact of the Paris Olympics on some bookings in Europe and possible changes in demand for business travel.

In addition, some travelers decide to travel in late spring and early summer, which raises questions on demand in late summer.

Investors will gain more insight into the traditionally quieter end of summer and the remaining of the yr as airlines release their quarterly results, starting with Delta Airlines on Thursday.

Analysts consider Delta to be the most effective airline within the group, mainly on account of the airline's success in marketing costlier premium seats and the lucrative contract with American Express.

In April, Delta, essentially the most profitable U.S. airline, forecast adjusted quarterly earnings of $2.20 to $2.50 per share for the second quarter, down from adjusted earnings of $2.68 per share a yr earlier.

Delta, its rival United Airlineswhich reported the next week, and Alaska Airlines are the highest picks of airline analyst Scott Group of Wolfe Research, which said in a June 28 research note that the three have lower earnings risk and higher free money flow than other airlines.

Shares of Delta and United are each up about 14% this yr through July 5, leading a sector that has been mostly down this yr. Alaska shares are up about 2%.

Airports are busy this summer, but airlines have expanded their flight schedules each domestically and internationally, which is pushing prices down. According to consultancy Airline/Aircraft Projects, capability between the US and Europe increased by almost 8 percent in July in comparison with a yr earlier, with the brand new routes primarily targeting leisure travelers.

Fare tracking company Hopper reported in June that summer flights between the U.S. and Europe cost a mean of $892 in economy class, in comparison with $1,065 in summer 2023.

According to the newest U.S. inflation data, airfares fell nearly 6 percent in May in comparison with a yr ago.

Despite higher passenger numbers, some airlines admitted that revenues were lower than expected on account of the increased flight connections. American Airlines On May 28, the corporate lowered its second-quarter revenue and profit forecasts and announced the resignation of its chief business officer after a sales strategy backfired.

“The imbalance between domestic supply and demand has led to a weaker domestic pricing environment than we expected,” American Airlines CEO Robert Isom said the subsequent day at a Bernstein industry conference. “There is more discounting than there was a year ago. Now, capacity in the industry is expected to decline in the second half of the year, and that should help.”

Southwest Airlines In late June, the airline lowered its second-quarter forecast, citing changing demand patterns. The Dallas-based carrier is under pressure to quickly change its long-profitable business model – which features no seat reservations and just one class of service – as major rivals equivalent to United and Delta tout strong growth in premium cabins.

The airline is attempting to fend off activist investor Elliott Investment Management, which disclosed in June that it owned a virtually $2 billion stake within the airline and called for a change in leadership.

“We will adapt as our customers' needs adapt,” Southwest CEO Bob Jordan said June 12 at an industry event hosted by Politico to debate potential recent revenue initiatives.

Both American and Southwest will announce their second-quarter results towards the tip of July.

Some loss-making airlines equivalent to JetBlue Airways And Border airlinesare already making changes.

JetBlue has canceled unprofitable flights this yr and ensured that planes with the luxurious business cabin “Mint”, whose tickets can cost greater than 4 times the economy fare, are used on the proper routes.

Meanwhile, Frontier Airlines and other discount airlines Spirit Airlines have eliminated change fees for traditional coach tickets and above, following an identical move by larger, established airlines in the course of the pandemic. Both budget carriers announced in May that they might begin offering package fares that include seat reservations and other additional services for which they previously charged fees.

Spirit is grappling with the fallout from a judge's ruling that barred JetBlue from buying the airline and has been hit hardest by the grounding of Pratt engines. The airline warned about 200 pilots last week that they might be furloughed this yr, based on the pilots' union.

At Spirit's annual shareholder meeting in June, CEO Ted Christie dismissed suggestions that Spirit was considering filing for Chapter 11 bankruptcy since it faces a debt payment of greater than $1 billion due in September 2025.