Coin World News Report:
The record-breaking demand for summer air travel has not translated into record profits for US airlines. Operators will have to take responsibility for this disconnect when they announce quarterly results this month. Some airlines are predicting record demand and, in some cases, record revenue. However, higher labor and other costs have eroded airline profits. In order to adapt to slower demand growth and other challenges, recruitment by some airlines has slowed down, even if it hasn’t stopped, compared to the hiring boom during the post-pandemic rebuilding phase. Some airlines are facing delays in the delivery of new, more fuel-efficient aircraft from Airbus and Boeing, while engine recalls by Pratt & Whitney have led to dozens of planes being grounded.
However, according to data from aviation data firm OAG, US airlines have increased their capacity, with seat availability in July up by around 6% compared to July 2023. This expansion is keeping ticket prices in check and airline stocks have lagged behind the market. The Arca Airline Index, which tracks 16 major US airlines, has fallen nearly 19% this year, while the S&P 500 index has risen by 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” and listed several negative factors such as a potential weakening of spending by premium cabin customers, the impact of the Paris Olympics on some European bookings, and potential changes in corporate travel demand.
In addition, some travelers chose to travel in late spring and early summer, raising questions about demand in late summer. Investors will gain more insight into traditionally slower late summer and the remainder of the year when airlines release their quarterly results, starting with Delta Air Lines on Thursday. Delta Air Lines is widely regarded as the best among them, largely due to the airline’s success in marketing more expensive premium seats and a lucrative agreement with American Express. In April, Delta Air Lines, the most profitable US airline, forecast adjusted earnings of $2.20 to $2.50 per share for the second quarter, below the adjusted earnings of $2.68 per share in the same period last year. Delta Air Lines, along with its competitors United Airlines, will report next week, while Alaska Airlines is the top pick of Wolfe Research airline analyst Scott Group. In a research note on June 28, Scott Group said these three airlines had less earnings risk and better free cash flow than other airlines. As of July 5, Delta Air Lines and United Airlines’ stocks have risen by about 14% this year, outperforming the industry, which has mostly declined. Alaska’s stock is down about 2%.
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Cheaper fares
Airports have been bustling this summer. According to data from 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 data from consulting firm Airlines/Aircraft Projects, capacity in the US and Europe in July is up by nearly 8% compared to a year ago, with new routes primarily targeting leisure travelers. Ticket tracking company Hopper reported in June that the average price of long-haul flights between the US and Europe this summer was $892, compared to $1,065 in the summer of 2023. According to the latest US inflation data, airfare prices in May were down nearly 6% year-on-year.
Lowered forecasts
Despite the increase in passenger numbers, some airlines have admitted that revenues are below expectations due to increased flight capacity. On May 28, American Airlines lowered its second-quarter revenue and profit forecast and announced the departure of its chief commercial officer after its sales strategy backfired. The next day, American Airlines CEO Robert Isom said at a Bernstein industry conference, “There’s been a domestic supply-demand imbalance that has led to a weaker domestic pricing environment than what we had forecasted… There’s more discounting going on than there was a year ago. Now, industry capacity is expected to decline in the back half of the year, and that should help.”
Southwest Airlines lowered its second-quarter forecast in late June, citing a change in demand patterns. The Dallas-based airline is under pressure to quickly change its long-standing business model that doesn’t include seat assignments and premium service, as larger competitors like United Airlines and Delta Air Lines tout strong growth in premium cabins. The airline is trying to fend off activist investor Elliott Investment Management, which disclosed nearly $2 billion in shares of the airline in June and called for a change in leadership. On June 12, Southwest Airlines CEO Bob Jordan discussed potential new revenue initiatives at an industry event hosted by Politico, saying, “We’ll adjust as demand dictates.” Both American Airlines and Southwest Airlines will report their second-quarter results at the end of July.
Making changes
Some struggling airlines, such as JetBlue Airways and Frontier Airlines, have made changes. JetBlue has been cutting unprofitable flights this year and making sure its aircraft equipped with its premium Mint business class are on the right routes. Mint business class tickets are priced at more than four times the average long-haul coach fare. Meanwhile, Frontier Airlines and fellow discount carrier Spirit Airlines have eliminated change fees for standard coach and above, a move previously taken during the pandemic by major legacy carriers. Both low-cost carriers announced in May that they would begin offering bundled fares that include seat assignments and other fees they used to charge separately. Spirit warned about 200 pilots last week that they may be furloughed this year, according to the pilots’ union. Spirit is grappling with the impact of a judge’s ruling blocking the acquisition of the carrier by JetBlue, as well as being the airline most affected by the grounding of Pratt & Whitney engines. During Spirit’s annual shareholder meeting in June, CEO Ted Christie denied rumors that Spirit was considering filing for Chapter 11 bankruptcy protection, as the company faces over $1 billion in debt due in September 2025.
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