Airline profits are down even as travel demand hits record highs

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

Some airlines anticipated record demand and, in some cases, record revenue. But rising labor and other costs have eaten into airlines’ bottom lines. To adjust to slowing demand growth and other challenges, some airlines have slowed or even halted hiring, in contrast to the massive hiring that took place as they rebuilt from the pandemic.

And some airlines are facing delays in the delivery of new, more fuel-efficient planes from Airbus and Boeing at the same time as a Pratt & Whitney The engine recall has grounded dozens of planes.

Still, U.S. airlines have been adding capacity, adding about 6% more seats in July than they will in July 2023, according to aviation data firm OAG. That expansion is helping keep airfares in check, and stocks in the sector have lagged the broader market.

THE NYSE Arca Airlines Index, which tracks 16 mostly U.S. airlines, is down nearly 19% this year, while the S&P 500 grew by more than 16%.

What the third quarter will look like for airlines is “crystal clear,” Raymond James analyst Savanthi Syth said in a note Friday, citing headwinds such as potentially weaker spending by economy customers, the impact of the Paris Olympics on some European bookings and possible shifts in business travel demand.

Additionally, some travelers have opted for late spring and early summer travel, raising questions about late summer demand.

Investors will get more information about the traditionally quieter end of the summer and the rest of the year when airlines report quarterly results, starting with Delta Airlines THURSDAY.

Analysts consider Delta to be the best of the bunch, largely due 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 adjusted quarterly profit of $2.20 to $2.50 per share for the second quarter, down from $2.68 per share a year earlier.

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

Shares of Delta and United are up about 14% each this year through July 5, making them stand out in a sector that has been mostly down this year. Shares of Alaska are down about 2%.

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

Airlines have expanded their schedules, both domestically and internationally, leading to lower fares. Capacity between the U.S. and Europe for July increased nearly 8% from last year, with the new routes primarily catering to leisure travelers, according to consultancy Airline/Aircraft Projects.

Fare-tracking company Hopper reported in June that summer flights between the U.S. and Europe in economy class cost an average of $892, compared to $1,065 for summer 2023.

According to the latest US inflation data, airfares fell by nearly 6% in May compared to a year earlier.

Despite higher passenger numbers, some carriers admitted lower-than-expected sales due to the increase in the number of flights. American Airlines On May 28, the company cut its revenue and profit forecast for the second quarter and announced the departure of its chief commercial officer after a failed sales strategy.

“The imbalance between domestic supply and demand has led to a weaker-than-expected pricing environment,” American Airlines CEO Robert Isom said at a Bernstein conference the next day. “There’s more discounting activity than last year. Now, industry capacity is expected to decline in the second half of the year, which should help.”

Southwest Airlines In late June, the airline lowered its second-quarter forecast, citing a shift in demand. The Dallas-based carrier is under pressure to quickly change its long-profitable business model — which features no assigned seats and only one class of service — as larger rivals like United and Delta tout strong growth in premium cabins.

The airline is trying to fend off activist investor Elliott Investment Management, which disclosed a nearly $2 billion stake in the carrier in June and called for a change in leadership.

“We will adapt as our customers’ needs evolve,” Southwest CEO Bob Jordan said at a Politico industry event on June 12, discussing potential new revenue initiatives.

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

Some loss-making carriers, such as JetBlue Airways And Frontier Airlinesare already bringing changes.

JetBlue has cut unprofitable flights this year and made sure that planes equipped with its premium Mint business cabin, where tickets can cost more than four times the price of economy class, are flying the right routes.

Meanwhile, Frontier Airlines and other low-cost carriers Spirit Airlines Budget airlines have waived change fees for standard and premium economy tickets, following the lead of major legacy airlines during the pandemic. Both budget airlines announced in May that they would begin offering bundled fares that include seat assignments and other extras they previously charged.

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

At Spirit’s annual shareholder meeting in June, CEO Ted Christie brushed off suggestions that Spirit was considering filing for Chapter 11 bankruptcy protection, with a debt payment of more than $1 billion due in September 2025.