Strong Demand, Low Fares: Airlines Struggle to Balance Earnings
Average domestic airfares are currently around 11% lower than this time last year despite increased capacity, causing several airlines to adjust their revenue forecasts
Several airlines in the United States have revised their earnings projections for Q3 2023, citing decreased airfares nationwide as a hindrance to their potential growth.
American Airlines, Southwest Airlines, and Alaska Airlines are among the domestic carriers to have dampened their revenue expectations for Q3 in recent financial reports, despite strong demand for air travel as the industry recovers from the effects of the pandemic.
A commonly cited reason for the lowered expectations is the significantly lower airfares compared to previous months and years.
After the pandemic restrictions have been lifted, domestic and international travel airfares have been significantly high, mainly because airlines have been trying to recover their lost earnings. However, with schedules returning to normal levels and demand surging, the market has higher competition, leading to a drop in average airfares.
Based on data from Hopper, the current average cost of a round-trip flight within the United States is approximately $258. This reflects an 11% decrease from the previous year and a 9 percent reduction from pre-pandemic levels in 2019. Meanwhile, international airfares are averaging around $958 per round-trip, 8 percent higher than last year and about 23 percent more expensive than in 2019.
Last week, American Airlines said its unit revenues for the current financial quarter are expected to be around 6.5 percent lower than last year. However, it still expects unit revenues for the entire year to increase marginally compared to 2022.
Also, last week, Southwest Airlines predicted that unit revenues for the current quarter would drop by up 7 percent compared to the same period in 2022, despite a 12 percent jump in capacity. It also estimated that unit costs apart from fuel will rise between 3.5 and 6.5 percent compared to last year, although it still expects to make record revenue for the current quarter.
The updated forecasts caused shares in Southwest to drop by over 9 percent last Thursday, eliminating its gains for 2023. However, the low-cost carrier said it would re-evaluate its network operations next year to meet better changing travel trends, such as the ongoing low demand for business travel.
Alaska Airlines has also revised its revenue outlook, predicting unit revenues to be around 9 percent lower this year than last, despite the carrier’s capacity increasing by about 13 percent over the same period.
“As we approach the rest of the year and beyond, it is clear our environment is evolving as domestic leisure fares have recently started to come down from their peaks,” said Ben Minicucci, CEO of Alaska Airlines.
And lastly, JetBlue also lowered its projected profits for 2023 and cautioned that it may incur losses this quarter due to the ending of its revenue-sharing Northeast Alliance (NEA) deal with American Airlines.
Despite revealing its highest quarterly profit since before the pandemic, JetBlue cited future operational challenges due to the impact of its NEA with American Airlines ending, along with a resurgence of demand for long-haul travel at the expense of short-haul leisure travel, as reasons for lowering its profit forecast for 2023.
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