U.S. Airlines Hit by Decreased Domestic Travel Demand

The U.S. airline industry is facing a decline in airfares and a hit to stocks as Americans show a preference for international travel over domestic vacations. Federal data reveals that airfares across the industry dropped by 13.3% in August compared to the previous year, marking the fifth consecutive month of decreases. This trend comes at a time when airlines are grappling with soaring jet fuel prices and rising labor costs.

Doubts about whether carriers will be able to raise fares enough to offset these mounting expenses have caused airline stocks to plummet. The U.S. Global Jets exchange-traded fund, which tracks the industry, has dropped 19% from its peak in July, although it has gained 5.4% this year due to an uptick in travel after the pandemic. American Airlines and Southwest Airlines have experienced stock declines of 29% and 24%, respectively.

The industry’s performance stands in contrast to the S&P 500, which has seen a 1.5% increase over the same period. Andrew Didora, a senior airlines analyst at Bank of America, noted that the industry relies on pricing power, and concerns exist over whether pricing will be sufficient as fuel costs rise.

The airline industry has endured a turbulent few years, with the pandemic leading to a shutdown of travel, significant government aid, and substantial borrowing. However, as restrictions eased and pent-up demand fueled travel, airfares surged by up to 43% in 2022 compared to the previous year. This resulted in record revenues for airlines, and major carriers saw their stock prices more than double from their 2020 lows.

Although people are still traveling and filling airplanes, their destinations have shifted. Spirit Airlines, which mainly operates domestic flights, has had to heavily discount travel bookings for the late summer to pre-Thanksgiving period, causing a revision of its revenue forecast for the third quarter. Southwest Airlines also reported that while overall demand is healthy, August bookings were lower than expected.

Investors are concerned about the sustainability of the post-pandemic leisure travel surge and whether high-profit corporate travel will fully return. Prior to the pandemic, business travelers accounted for about 50% of profits and 12% of traffic for U.S. airlines. Major carriers such as American Airlines, Delta Air Lines, United Airlines, and Alaska Air Group have all warned of higher costs for the third quarter than initially projected.

Airlines are grappling with an approximately 25% increase in fuel prices since July, and labor costs are set to rise as well. American Airlines and Delta pilots have secured new contracts that include pay raises of 46% and 34%, respectively, over a four-year period. While airlines could attempt to pass these higher costs onto customers by raising fares, consumers may be less willing to spend as much on trips as their focus on travel dissipates post-pandemic.

– Federal data
– Charley Grant from The Wall Street Journal