Softening Domestic Travel Demand Casts Uncertainty Over U.S. Airline Earnings
Despite a travel boom resulting in robust earnings for major U.S. carriers this year, concerns are growing as signs of declining demand on domestic routes raise fears that the aviation industry’s prosperous run may be coming to an end. This apprehension has triggered a sell-off in airline stocks and led analysts to revise down their earnings projections.
As airlines begin to release their third-quarter results, commencing on Thursday Oct. 12, industry watchers are keen to see how carriers intend to sustain profitability amid a potential dip in consumer demand.
Airline executives have been emphasizing that travel remains a top priority for consumers and have attributed the dip in domestic travel demand to an increase in bookings for international trips. Nevertheless, analysts and investors are beginning to wonder if this might be an early indication of weakening demand. The recent drop in international fares following the summer travel surge has only amplified these concerns.
Jefferies analyst Sheila Kahyaoglu remarked, “Demand is flashing warning signs.”
Facing elevated fuel and labor costs, the airline sector has been relying on strong demand to help offset inflationary pressures through higher ticket prices. However, airline fares have seen double-digit declines compared to the previous year. Prices for holiday travel have also slumped.
Data from online travel agency Hopper reveals that average domestic round-trip airfare for Thanksgiving next month is down by 14% compared to the previous year. Similarly, fares for the Christmas travel season have dropped by 12% from a year ago.
Ultra-low-cost carrier Spirit Airlines recently reduced its profit forecast for the third quarter, citing “heightened promotional activity with steep discounting.” Frontier Airlines also indicated pressure to offer “very, very low” fares to fill its planes.
Analysts have been advocating for airlines to cut capacity in order to safeguard their pricing power. In the third quarter, carriers increased capacity in the U.S. domestic market by 10% compared to the previous year and are planning for a 9% increase in the current quarter.
“Until there is a meaningful downward revision in capacity, the challenging setup will continue,” warned Conor Cunningham, an analyst at Melius Research.
Meanwhile, jet fuel prices have risen at a faster pace, exacerbating cost pressures. United Airlines reported that its fuel costs had surged over 20% since mid-July. This factor contributed to several carriers, including Delta Air Lines and American Airlines, revising down their profit forecasts for the September quarter. Delta is expected to report earnings on Thursday, while American will release its quarterly report on October 19.
Sources: AirGuide Business airguide.info, msn.com, reuters.com