US Airlines Brace for Turbulent Times as Economy Falters, Costs Soar
US airlines are preparing for a challenging period ahead as concerns over a faltering economy and rising costs cast a shadow on the industry’s profitability. Despite a strong demand for travel, investors are growing increasingly nervous about the potential impact of a weakening economy on airline earnings. This uncertainty has taken a toll on airline stocks, with United Airlines experiencing a 10% drop in shares after projecting lower-than-expected fourth-quarter profits due to mounting expenses.
The aviation industry heavily relies on consumer demand, and any decline in demand can directly impact sales and profitability. Brian Mulberry, a client portfolio manager at Zacks Investment Management, stated that a decrease in demand would lead to lower sales and consequently, reduced profitability for airlines.
Delta Air Lines’ goal of achieving a profit of over $7 per share next year is being questioned as well. Some analysts now view this target as overly optimistic, which has contributed to a 10% decline in Delta’s shares even after reporting better-than-expected quarterly earnings.
While strong demand from travelers has thus far allowed airlines to offset inflationary pressures through higher fares, falling ticket prices are now raising concerns about how airlines will counterbalance cost increases. Delta CEO Ed Bastian recently suggested that the industry could pass along operating cost increases to consumers. However, analysts argue that declining pandemic savings and high interest rates have limited consumers’ tolerance for high fares.
With the significant hike in operating costs, including fuel prices and labor expenses, airlines are likely to experience a more severe negative impact if there is a downturn in demand. Mulberry emphasized that the cost of doing business for airlines has significantly increased, making them more vulnerable to any fluctuations in demand.
Fuel and wage bills constitute a substantial portion of operating costs for airlines. In the third quarter, approximately 50% and 57% of Delta and United’s operating costs were attributed to fuel and wages, respectively. With new labor contracts and rising fuel prices, the cost pressures on airlines are not expected to dissipate.
Delta estimates that rising fuel prices will inflate its costs by $400 million in the second half of the year. Consequently, the airline has revised its profit outlook for 2023 to a range of $6.00 to $6.25 per share, down from the previous estimate of $6 to $7 per share in July.
Similarly, United anticipates an 11% increase in its average fuel bill for the December quarter compared to the previous quarter. The airline has also faced headwinds from the Israel-Hamas conflict, negatively impacting its profitability.
Aircraft and jet-engine delivery delays have further complicated matters for airlines. As a result, carriers have had to rely on older, less fuel-efficient planes, incurring higher costs for maintenance and operations.
Delta projects that non-fuel costs will either remain flat or increase by up to 2% year-over-year in the current fourth quarter. This is a departure from the initial forecast of low single-digit declines made in July.
Observing the airlines’ failure to meet their cost targets, industry analysts have found it challenging to accept the situation. Balancing the need for profitability with the rising costs and uncertainties, airlines will need to navigate through this challenging period with caution.
Both United and Delta have emphasized that despite the increasing costs, there is still a healthy demand for travel, and customers prioritize travel as a significant expenditure. However, the industry’s ability to maintain pricing power in the face of declining airfares remains uncertain.
As airlines work towards mitigating the impacts of rising costs, the coming months will be crucial for the industry’s future and its ability to protect profits amid an uncertain economic climate.
