Demand, Costs In Focus As U.S. Airlines Report Earnings

Major U.S. airlines are poised to post their strongest earnings since the start of the pandemic when they report quarterly results starting on Wednesday.

But mounting economic worries are unsettling their investors, who are looking for clues to gauge the strength of consumer demand beyond the busy summer travel season.

Inflation at a 40-year high and rising interest rates have raised the specter of an economic recession in the United States. With air fares also surging, some analysts are warning of a slowdown in travel spending in the second half of the year.

Those worries have battered airline shares even as booming travel demand is driving up the industry's revenue.

The NYSE Arca Airline index has fallen 25% since late May. In contrast, U.S. passenger traffic is up 18% this summer from a year ago and has been averaging about 89% of the pre-pandemic levels since the Memorial Day holiday weekend in May, according to Transportation Security Administration (TSA) data.

Analysts at Jefferies are not sure if the demand will remain as strong in the fall. In a note, they said airline revenue is expected to "materially weaken" in September following a moderation in leisure travel demand.

Airline chiefs, however, have played down those concerns. They are betting healthy U.S. household savings as well as strong pent-up demand will help fill flights.

Frontier Airlines Chief Executive Barry Biffle said his company has not seen any "degradation" in the bookings. If anything, he said the travel demand is only getting stronger.

"It's the best environment we've ever had in the industry," Biffle told Reuters.

The industry is counting on an increase in international traffic and corporate bookings to offset any slowdown in leisure bookings, which have been trending above 2019 levels.

Online searches by consumers for international travel from the United States, including to Europe, have gone up following the White House's decision to scrap COVID-19 testing requirements.

Similarly, office reopenings have boosted corporate travel demand. Biffle said the fall bookings for business convention cities like Orlando, Florida, and Las Vegas have picked up.

International as well as corporate travel tends to be higher-margin business for carriers. Any improvement in those segments is expected to give a lift to United Airlines, Delta Air Lines and American Airlines.

COST PRESSURE

Booming demand, thus far, has been allowing carriers to raise fares and offset their soaring costs. Jet fuel prices, for example, have gone up by more than 80% in the past year.

Fuel is the industry's second-biggest expense after labor, but major U.S. airlines do not hedge against volatile oil prices. They rely on higher fares to offset fuel costs.

While the prices have come down in the past month, some analysts say supply constraints would not allow for a substantial correction. United Airlines, which is due to report second-quarter earnings on July 20, sees high fuel prices as the new normal for the industry.

Carriers are also bracing for an increase in labor costs.

American has offered its pilots a base pay increase of about 17% after United agreed to a double-digit pay hike for its pilots. To attract and retain talent, American has also announced hefty pay increases for pilots at its regional carriers.

Those offers are expected to act as a benchmark for contract negotiations at other carriers. Biffle calls it a "challenge" that would compel his airline to be "more efficient."

"It's called pattern bargaining for a reason," he said. "When one airline goes up, other union contracts tend to follow."