CHICAGO/NEW YORK: US airlines were flying high less than two months ago on talk of a new golden age, as strong travel demand and tight industry-wide capacity raised the prospect of a multi-year profit boom.
But President Donald Trump’s broad tariffs and a crackdown on government spending have upended that optimism. Tourists and companies have reduced spending amid rising economic uncertainty, forcing carriers to cut their first-quarter profit forecasts.
With travel a discretionary item for many consumers and businesses, growing odds of weak economic growth and high inflation have clouded the outlook for the remainder of the year as well.
The S&P 500 passenger airlines index is down about 15 per cent this year and widely underperforming the broader S&P 500 index. Shares of Delta and United Airlines have fallen about 20 per cent each this year. Discounter Frontier Airlines is down 2.0 per cent.
“Your first needs are food and shelter. And then, we’re a little bit down the list of expenditures,” said David Neeleman, CEO of low-cost carrier Breeze Airways, in an interview. “If you don’t have a job, you’re not going to go buy an airline ticket.”
With demand slowing, airlines have started culling flights to avoid lowering fares and to protect margins. Frontier, Delta, United, American Airlines, JetBlue and Allegiant all trimmed their April-June quarter capacity in the past two weeks.
United CEO Scott Kirby has warned of a large drop in industry-wide capacity by the second half of August if demand does not rebound.To be sure, bookings for premium and long-haul travel are holding up. United reported an 8.0 per cent year-on-year jump in spring international bookings.
Some of the demand slowdown is also due to recent safety incidents. Amanda Demanda Law Group data shows airplane safety concerns reached an all-time high in February, with Google searches for “Are planes safe now?”” up 900 per cent.
Airlines expect the hit from safety incidents to fade soon. But they are less sure about economic pressures.
WARNING SIGNS
US consumer confidence plunged to the lowest level in more than four years in March, with future expectations for income, business, and labour market conditions hitting a 12-year low, a Conference Board survey showed on Tuesday.
Air tickets sold through US travel agencies fell 8.0 per cent month-on-month in February after a 39 per cent jump in January. Both corporate and leisure trips were down, Airlines Reporting Corp data showed last week.
Annual growth in passenger traffic slowed to 0.7 per cent in March from 5.0 per cent in January, according to US Transportation Security Administration data.
Weakening demand is hurting the industry’s pricing power. Fares posted their first year-on-year decline in six months in February, according to data from the US Labor Department. “There’s going to be some type of slowdown,” Frontier CEO Barry Biffle said in an interview.
Airlines are still backing their full-year earnings estimates. But that could change if demand remains weak during summer, usually the industry’s most profitable season.
Biffle said much depends on the labour market. “As long as the employment is good, the leisure customer will be fine,” he said.
Jobless claims have only inched up, thus far. But inflationary worries are making travellers more cautious.
Jacob Brown, a 24-year-old Denver school teacher, is flying less, avoiding hotels and spending less during his trips due to inflation. Brown recently flew to Las Vegas but took the red-eye flight back to Denver to save on lodging.“I’m only traveling when it’s at an absolute minimal cost,” he said.
