Record summer demand for air travel isn’t translating into record earnings for American airlines. When carriers release their quarterly earnings this month, they will be held accountable for that discrepancy.
Record demand and, in some situations, revenue have been projected by certain airlines. Over 3 million individuals were inspected by the Transportation Security Administration on Sunday, setting a record for a single day.
However, increased labor and other expenses have reduced the profitability of airlines. In contrast to their recruiting binges during the epidemic reconstruction, several carriers have curtailed, if not completely stopped, their hiring in order to adjust to slower demand growth and other obstacles.
Additionally, several airlines are experiencing delays in receiving new, fuel-efficient Airbus and Boeing aircraft, while dozens of planes have been grounded due to a Pratt & Whitney engine recall.
However, according to aviation data company OAG, U.S. carriers have boosted capacity, flying almost 6% more seats in July than they did in July 2023. The growth is controlling fares, and the industry’s equities have underperformed the overall market.
The S&P 500 has increased by more than 16% this year, while the NYSE Arca Airline Index, which monitors 16 largely American airlines, has decreased by about 19%.
“As clear as mud”
In a note published on Friday, Raymond James analyst Savanthi Syth stated that the airline industry’s third-quarter outlook is “clear as mud.” She listed several challenges, including the possibility of declining coach-class customer spending, the impact of the Paris Olympics on some European reservations, and potential shifts in the demand for business travel.
Furthermore, there are concerns about late-summer demand since some passengers are choosing to go on excursions in the late spring and early summer.
Airlines, beginning with Delta Air Lines on Thursday, will release their quarterly results, providing investors with additional information about the historically sluggish end of summer and the remainder of the year.
Due in large part to its effectiveness in promoting more costly, premium tickets and its profitable partnership with American Express, analysts rank Delta as the top airline overall.
The most successful American airline, Delta, predicted in April that its second-quarter adjusted profits would be between $2.20 to $2.50 per share, a decrease from the adjusted $2.68 per share it earned the previous year.
According to aviation analyst Scott Group of Wolfe Research, who said in a research note dated June 28, all three airlines—Delta, its competitor United Airlines, which reports the following week, and Alaska Airlines—have lower earnings risk and stronger free cash flow than other carriers.
As of July 5, shares of United and Delta had increased by around 14% apiece, making them the exceptions in an otherwise declining industry. Alaska’s stock is down around 2%.
airline reduced fares
This summer airports are full with activity. The Transportation Security Administration reports that on June 23, a record-breaking over 3 million individuals went through airport security checkpoints in the United States.
Fares have decreased as a result of airlines increasing their local and international itineraries. According to consultancy company Airline/Aircraft Projects, capacity between the United States and Europe for July is up about 8% from a year earlier, with additional routes mostly aimed at leisure tourists.
In June, the fare-tracking startup Hopper revealed that coach summer flights from the United States to Europe were averaging $892, while summer 2023 tickets will cost $1,065 on average.
The most recent U.S. inflation statistics shows that airfare decreased by about 6% in May compared to the same month last year.
reduced expectations
Some airlines have acknowledged that, despite greater passenger numbers, revenues were not as strong as anticipated due to the additional flights. On May 28, American Airlines announced the departure of its chief commercial officer after the failure of a sales plan, and it lowered its expectations for second-quarter revenue and profit.
“We had not anticipated a weaker domestic pricing environment caused by the imbalance between domestic supply and demand,” said Robert Isom, CEO of American Airlines, the following day at a Bernstein industry conference. “Discounting activity has increased compared to a year ago.” It is anticipated that industrial capacity would decrease in the second part of the year, which should be beneficial.
Due to changing demand patterns, Southwest Air lines lowered its second-quarter outlook in late June. With no seat assignments and just one class of service, the Dallas-based airline’s long-profitable business model is under pressure to shift rapidly as major competitors like United and Delta boast robust growth from premium cabins.
Elliott Investment Management, an activist investor that revealed a roughly $2 billion interest in the air line in June and demanded a leadership transition, is something the air line is attempting to thwart.
At a Politico-hosted industry event on June 12, Southwest CEO Bob Jordan said, “We will adapt as our customers’ needs adapt,” addressing possible new revenue ideas.
By the end of July, American and Southwest both release their second-quarter earnings.
Making adjustments
A few financially struggling air, including Frontier Airlines and JetBlue Airways, are already implementing modifications.
This year, JetBlue has been eliminating flights that are not profitable and ensuring that aircraft equipped with its premium Mint business cabin—tickets for which may cost up to four times that of a coach ticket—are operating on the appropriate routes.
In the meanwhile, following the lead of bigger, legacy air during the epidemic, Frontier Air and rival discounter Spirit Air have eliminated change costs for ordinary coach tickets and above. In May, both low-cost carriers said that they would begin providing bundled rates that would include seat assignments and other add-ons that were previously extra.
According to the pilots union, Spirit, which is most impacted by the Pratt engine grounding and is dealing with the consequences from a judge’s decision that prevented JetBlue from purchasing the air, informed around 200 pilots last week that they would be placed on furlough this year.
With a more than $1 billion debt payment due in September 2025, CEO Ted Christie dismissed rumors at Spirit’s annual shareholder meeting in June that the company is thinking about applying for Chapter 11 bankruptcy protection.
As a result of the downturn, analysts predict that airlines will reduce the size of their fleets. They point out that this could be accomplished in one of two ways: either by modernizing their fleets, which would speed up the retirement of older aircraft and maintain scheduled deliveries of new, more fuel-efficient models, or by keeping older aircraft and lowering capital expenditure on new ones.
According to Airports Council International, there will be 4.6 billion fewer travelers in 2020 than there were in 2019. With the exception of North America, where they are expected to decline by 36%, the IATA predicts that RPKs will drop by half from 2019 to $314 billion in decreased revenues, a 55% decline. According to the organization, air travel will take up to two years to recover from the economic downturn. In 2021, air traffic is expected to decrease by 24% from 2019, and it will eventually return to 2019 levels by 2023–2025.
By mid-April 2020, 7,400 mainline aircraft remained in operation, with 14,500 in storage. This represents one-third of the fleet overall, including a fifth for European carriers; before to this, there were 1,800 in storage and 20,200 in active service. Mid-June saw 10,500 of the 11,500 aircraft remaining in storage and 11,500 operating, representing a 35% decrease in average daily utilization from 2019.
Asia-Pacific airlines accounted for about 75% of the flying fleet, followed by Europe with a third of the fleet still in storage and North America with a 50/50 split.[46] In the first half of 2020, major airliner deliveries fell from an average of 90 to 100 aircraft per month to fewer than 40 on average.
The same indicator measured 105% of 2019 activity in the last quarter of 2022: 84% of passengers paid higher tickets because of high demand and limited capacity, 97% of the fleet size, and 92% of the workforce.
According to Sun et al.’s research, the International Air Transport Association (IATA) advises keeping a space of 1-2 meters between passengers at all times throughout the epidemic. Therefore, airlines throughout the world have reacted by changing the boarding sequence and procedure in order to maintain acceptable social separation.
For instance, United Airlines’ seating and boarding policies are to arrange the rows from back to front, business class first, and leave the middle seats unoccupied on Delta Air Lines. Despite the fact that airlines use a rear-to-front boarding procedure, research indicates that this approach is delayed and does not always result in less social intimacy.
Manufacturers cut airliner manufacturing rates and were building aircraft they are unable to deliver in early 2020 as a result of the pandemic’s impact on demand for new aircraft. Airbus reduced its monthly output of A320s from sixty to forty, A330s from four to two, and A350s from nine to six.
Boeing’s monthly production of 787s dropped from 14 to six, that of 777s from five to two, and the 737 Max was already produced at a lower rate—31 per month by early 2022 was the plan. According to Bloomberg, 30 aircraft per month from Airbus and Boeing, mostly for single-aisles, are anticipated by 2021.
