U.S. Airlines Forecast Strong 2023 Travel, Costs May Dampen Outlook

U.S. airlines expect strong travel demand that drove record fourth-quarter revenues to continue into 2023, but economic uncertainty and burgeoning labor and operations costs could cloud their rosy outlooks.

On Thursday, American Airlines, JetBlue Airways Corp and Alaska Air Group forecast better-than-expected full-year earnings.

Airlines are cashing in as consumers snap up tickets following a pandemic-induced slump, making the industry a rare bright spot as markets grasp with runaway inflation, rising interest rates and economic uncertainty.

American Airlines Chief Executive Robert Isom said post-holiday bookings surged, underpinned by domestic and short-haul international flights.

"We expect a strong demand environment to continue in 2023 and anticipate further improvement in demand for long-haul international travel this year," he told analysts.

But while limited capacity due to a scarcity of aircraft has allowed airlines to raise fares to offset rising costs, higher pilot pay and other pressures could sap carriers' profits.

"In addition to the higher labor costs, we're working hard to offset cost pressures from higher rents and landing fees tied to operating and growing in high-cost terminals across our high-value geography as well as elevated maintenance activity, given the age of our fleet," JetBlue CFO Ursula Hurley told analysts.

Shares of American moved in and out of positive territory, while JetBlue shares were down in midday trade. Gains were held in check as some investors were disappointed with first-quarter outlooks, Cowen analyst Helane Becker said.

JetBlue forecast expenses excluding fuel to rise 1.5% to 4.5% in 2023. Negotiations with pilots, along with other issues "could result in some adjustments to (JetBlue's) 2023 outlook", Citi analysts warned in a note.

Alaska Air on Thursday warned that it would face pressures from higher labor costs and expenses related to pilot training as it phases out Airbus SE jets in favor of Boeing Co planes.

In a sign that travel demand was losing some steam, credit card giant Mastercard Inc forecast current-quarter revenue growth short of Wall Street estimates on Thursday, saying the boost from pent-up demand for travel will diminish going forward.

The U.S. economy, meanwhile, grew faster than expected in the fourth quarter but some analysts are warning that the pace of growth may slow as the impact from the U.S. central bank's interest rate hikes take hold.

China's recent reopening may also boost international travel, but demand remains uncertain and U.S. airlines face challenges toward cashing in.

"The airline industry will benefit as travel reopens, but we anticipate more outbound travel from China to the West than from the West to China as Chinese consumers take their turn at 'revenge travel,'" Cowen's Becker said in a note.

American Airlines forecast an adjusted profit of $2.50 to $3.50 per share for 2023, handily beating analyst expectations of $1.77, according to Refinitiv data.

The resilient demand has allowed Fort Worth, Texas-based American to focus on fixing its debt-laden balance sheet. It has outlined a goal of paying down $15 billion of totaldebt by the end of 2025.

Earlier this month, rival carriers United Airlines and Delta Air Lines reported better-than-expected quarterly earnings and gave a bullish outlook amid recessionary fears.