Airline profits lag even as travel demand hits records

Record demand for air travel over the summer isn't translating into record profits for U.S. airlines. Carriers will have to account for that disconnect when they report quarterly results this month.

Some airlines have forecast record demand and, in some cases, revenue, but rising labor and other costs have weighed on airlines’ bottom lines. To adjust to slower demand growth and other challenges, some airlines have slowed, if not stopped, hiring compared with the hiring sprees they did as they rebuilt after the pandemic.

And some airlines are facing delays in manufacturing new, more fuel-efficient Airbus planes, and Boeing At the same time as a Pratt and Whitney The engine withdrawal has grounded dozens of planes.

U.S. airlines have, however, increased capacity and flown about 6% more seats in July than in July 2023, according to aviation data firm OAG. The expansion is keeping airfares in check and sector stocks have lagged the broader market.

He NYSE Arca Airline Index, which tracks 16 airlines, mostly American, is down nearly 19% this year, while S&P 500 Index It has advanced more than 16%.

“What will happen in the third quarter for airlines is clear as day,” Raymond James analyst Savanthi Syth said in a note Friday, citing headwinds such as potentially weaker spending by economy-class clientele, the impact of the Paris Olympics on some bookings in Europe and possible shifts in corporate travel demand.

Additionally, some travelers have opted to travel in late spring and early summer, 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 their quarterly results, starting with Delta Air Lines Thursday.

Analysts consider Delta to be 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, the most profitable U.S. airline, forecast second-quarter adjusted quarterly earnings of $2.20 to $2.50 per share, down from the adjusted $2.68 per share it earned a year earlier.

Delta, its rival united airlineswhich reports the following week, and Alaska Airlines are the top picks for Wolfe Research airline analyst Scott Group, who said in a June 28 research note that all three have less earnings risk and better free cash flow than other airlines.

Shares of Delta and United are each up 14% this year through July 5, the top performers in a sector that has been mostly down this year. Alaska shares are each down 14%. 2%.

Airports are busy this summer. Nearly 3 million people, a record, passed through security checkpoints at U.S. airports on June 23 alone, according to the Transportation Security Administration.

Airlines have been expanding their schedules, both domestically and internationally, driving down fares. Capacity between the U.S. and Europe for July is up nearly 8 percent from a year earlier, according to consulting firm Airline/Aircraft Projects, and the new routes are aimed primarily at leisure travelers.

Fare tracking firm Hopper reported in June that summer flights between the United States and Europe in economy class cost $892 on average, compared with $1,065 in summer 2023.

Airline ticket prices fell nearly 6% in May from a year earlier, according to the latest U.S. inflation data.

Despite higher passenger numbers, some airlines have admitted to weaker-than-expected sales due to the increase in flights. American Airlines On May 28, it cut its revenue and profit forecasts for the second quarter and announced that its chief commercial officer was resigning after a sales strategy failed.

“The imbalance between 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 hosted by Bernstein the next day. “There is more discounting activity than there was a year ago. Now, industry capacity 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 (with no assigned seating and a single class of service) as big rivals like United and Delta tout strong growth in premium cabins.

The airline is trying to fend off activist investor Elliott Investment Management, which in June disclosed a nearly $2 billion stake in the airline 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, where potential new revenue initiatives were discussed.

Both American and Southwest will report second-quarter results toward the end of July.

Some companies that lose money, such as JetBlue Airlines and Frontier AirlinesThey are already making changes.

JetBlue has been eliminating unprofitable flights this year and making sure planes equipped with its high-end Mint business cabin — where tickets can cost more than four times the price of an economy fare — are on the right routes.

Meanwhile, Frontier Airlines and other discount airlines Spirit Airlines They have eliminated change fees for standard economy and premium class tickets, following a move taken by larger legacy airlines during the pandemic. Both low-cost carriers announced in May that they will begin offering bundled fares that include seat assignments and other add-ons they used to charge.

Spirit, which is grappling with the fallout from a court ruling that blocked JetBlue from buying the airline and is the hardest hit by the grounding of the Pratt engines, last week warned about 200 pilots that they could be furloughed this year, according to the pilots union.

At Spirit's annual shareholder meeting in June, Chief Executive Ted Christie dismissed suggestions that Spirit is considering filing for Chapter 11 bankruptcy, with more than $1 billion in debt payments due in September 2025.