Summer travel surge fails to boost airline profits

Record summer travel demand was expected to translate into strong earnings for airlines, but quarterly reports are less than brilliant.

While many customers are flocking to visit locations throughout the world, airlines are discovering an excess supply of seats in the price-sensitive end of the market, forcing them to cut rates in order to fill their planes.

This week’s earnings from American (AAL.O) and Southwest Airlines (LUV.N) are likely to offer more bad news, following dismal quarterly outlooks from United (UAL.O), Delta (DAL.N), Alaska Airlines (ALK.N), and Ryanair (RYA.I).

Airline executives blamed the overcapacity on an overestimation of travel demand, which has been strong by most measures.

This year, passenger traffic in the United States has reached all-time highs. In the first six months, the US Transportation Security Administration (TSA) checked an average of 2.46 million airline passengers per day, a 6% increase from the previous year.

“It was just that airlines were hoping that it (demand) was going to be even stronger,” Alaska’s CFO Shane Tackett said during an interview.

In addition to discounting pressures, new labor contracts, higher lease rates, and maintenance charges have increased the industry’s operating costs.

American Airlines cut its second-quarter profit prediction in May, blaming decreased pricing power in the domestic market, and while the Texas-based carrier has promised to reverse direction, analysts believe doing so would be time-consuming and expensive.

“American’s network leaves it more exposed to the markets that are currently most oversupplied and less able to offset the higher cost environment,” TD Cowen analyst Thomas Fitzgerald explained.

Southwest has been heavily hurt by Boeing’s jet supply delays, and an activist investor is pressuring the company to fire its CEO, restructure its board, and alter up its operations.

The low-cost carrier has reduced its second-quarter revenue forecast. Fitzgerald stated that Southwest has few levers to significantly improve its revenue performance, increasing the risk to its balance sheet.


Both American and Southwest will release profits on Thursday.

Europe’s potential struggles

The first quarter for European airlines was rougher than expected, and Ryanair’s (RYA.I), opens new tab second-quarter earnings provided little comfort to investors on Monday.

Ryanair’s profits fell by nearly half in the quarter as ticket prices dropped 15% as customers balked at increasing rates.

Analysts fear that these pricing concerns could extend throughout the European business. “More aggressive pricing by the market leader is likely to result in adverse fallout for the other European airlines,” wrote Liberum analyst Gerald Khoo in a note.

Deutsche Lufthansa (LHAG.DE), opens a new tab, cut its 2024 earnings guidance for the second time and issued a profit warning for the second quarter last week, citing lower yields.

The earnings of British budget carrier easyJet on Wednesday and Air France-KLM (AIRF.PA), opens new tab on Thursday will shed light on the cost and revenue constraints, with some anticipating that Air France-KLM will be unable to recover from a poor first quarter.

On Monday, European airline shares plunged across the board, with Ryanair being struck the hardest, down 14%.

Wizz Air CEO Jozsef Varadi stated that the budget carrier expected long-term yields to rise, despite facing limits due to RTX engine checks that grounded a portion of its aircraft.

“I think we are doing better than this,” Varadi told Reuters, referring to Ryanair’s struggles with softer pricing.

US airlines are currently moderating capacity. Annual domestic seat growth is expected to decelerate to 3% in the September quarter, down from 6% a quarter earlier. Some carriers hope that this would strengthen their pricing power, but it may not be enough to increase profits.

United presently anticipates full-year earnings to slip to the lower half of its $9-to-$11 per share range. The airline is counting on competitors to eliminate unproductive flying to help boost revenues.

“While we see this incredible inflection upon us in the industry, the precise timing and magnitude is difficult to call,” United’s President Brett Hart told investors on Thursday.