Demand for air travel is breaking records. Airline profits are not.

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

Some airlines are predicting record demand and, in some cases, record revenue. On Sunday, the Transportation Security Administration screened more than 3 million people, a single-day record.

But higher labor and other costs have eroded airlines’ profits. To adjust to slower demand growth and other challenges, some airlines have slowed or even halted hiring compared with the surge they experienced when they reopened after the pandemic.

Some airlines are facing delays in the delivery of new, more fuel-efficient planes from Airbus and Boeing, while dozens of jetliners are grounded due to an engine recall from Pratt & Whitney.

Still, U.S. airlines have been increasing capacity, adding about 6% more seats in July than in July 2023, according to airline data firm OAG. The expansion has kept airfares in check, and stocks in the sector have lagged the broader market.

The NYSE Arca Airline Index, which tracks 16 mostly U.S. airlines, has fallen nearly 19% this year, while the S&P 500 has risen more than 16%.

‘Clear as mud’

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

Additionally, some travelers choose to travel in late spring and early summer, raising questions about late summer demand.

Investors will get more insight into the traditionally quiet end of summer and the rest of the year when airlines report their quarterly results, starting with Delta Air Lines on Thursday.

Analysts consider Delta to be the best of the bunch, largely due to the airline’s success in marketing higher-priced, premium seats and its lucrative deal with American Express.

In April, Delta, the most profitable U.S. airline, forecast adjusted quarterly earnings of $2.20 to $2.50 per share for the second quarter. That would be lower than the adjusted earnings of $2.68 per share a year earlier.

Delta, its rival United Airlines, which reports next week, and Alaska Airlines are top picks for airline analyst Scott Group of Wolfe Research. In a June 28 research note, he said the three carriers have less earnings risk and better free cash flow than other airlines.

Shares of Delta and United are each up about 14% this year through July 5, the outliers in a sector that has largely fallen this year. Shares of Alaska are down about 2%.

Cheaper rates

Airports are busy this summer. Nearly 3 million people, a record, passed through U.S. airport checkpoints on June 23 alone, according to the Transportation Security Administration.

Airlines have expanded their schedules, both domestically and internationally, and cut fares. U.S.-Europe capacity rose nearly 8% in July from a year ago, according to consultancy Airline/Aircraft Projects, with new routes largely catering to leisure travelers.

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

According to the latest US inflation figures, airfares were almost 6% lower in May than a year earlier.

Lowered forecasts

Despite higher passenger numbers, some airlines have admitted that sales were lower than expected due to increased flights. American Airlines on May 28 cut its second-quarter revenue and profit forecasts and announced that its chief commercial officer would step down after a sales strategy backfired.

“The domestic supply-demand imbalance has led to a weaker domestic pricing environment than we had anticipated,” American Airlines CEO Robert Isom said the next day at a Bernstein industry conference. “There is more discount activity than we saw a year ago. Now the industry is expected to see capacity decline in the second half of the year, and that should help.”

Southwest Airlines in late June lowered its second-quarter forecast, citing changing demand patterns. The Dallas-based carrier is under pressure to quickly change its long-profitable business model — which features no seat assignments and one class of service — as major rivals such as United and Delta tout strong growth in premium cabins.

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

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

Both American and Southwest report their second-quarter results at the end of July.

Making changes

Some loss-making airlines, such as JetBlue Airways and Frontier Airlines, are already implementing changes.

JetBlue is cutting loss-making flights this year and ensuring that planes with the luxurious Mint Business Class cabin, where tickets cost four times more than economy class, fly the right routes.

Meanwhile, Frontier Airlines and fellow discounter Spirit Airlines have eliminated change fees for standard coach tickets and above, following the move by larger, traditional carriers during the pandemic. Both budget carriers announced in May that they would start offering bundled fares that include seat assignments and other perks they previously charged for.

Spirit, which is grappling with the fallout from a judge’s ruling barring JetBlue from buying the airline and has been hit hardest by the Pratt engine shutdown, last week warned some 200 pilots they could be laid off this year, the pilots’ union said.

At Spirit’s annual shareholder meeting in June, CEO Ted Christie dismissed suggestions that Spirit was considering filing for Chapter 11 bankruptcy protection, which would require the company to pay off more than $1 billion in debt due in September 2025.

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