Full flights and busy airports are likely to continue in the U.S. through the end of the year, Wall Street analysts warn. Demand is forecast to remain robust as corporate travel continues to recover, and consumers shift spending back to services — like air travel — after a pandemic switch to goods.
Delta Air Lines and United Airlines could benefit the most from these trends in the fourth quarter, according to a recent report from Raymond James. This is not to say that revenues will weaken at other U.S. airlines, including American Airlines and Southwest Airlines, but more because Delta and United are more exposed to markets where the recovery has been slow but accelerated in recent months as more people return to offices and international markets reopen.
“It appears there is greater demand recovery among large corporates and in the northeast in particular, which along with gradual reopening of long-haul international markets likely places [United] and [Delta] in a relatively stronger position in terms of revenue recovery,” Raymond James analyst Savanthi Syth wrote.
New booking data from J.P. Morgan appears to confirm this view. In September, booked revenue for the fourth quarter was “comfortably ahead of 2019” at American and United, analyst Jamie Baker wrote Thursday. He added that Delta is expected to see similar trends.
A third point, and one beneficial to airlines, is consumers’ continued shift back to spending more on services. Melius Research analyst Conor Cunningham wrote Thursday that roughly 66 percent of consumer spending was on services in August compared to roughly 69 percent before Covid. He expects the percentage to revert to the pre-crisis norm in the months ahead.
“This is an important theme as it speaks on steadily improving demand for travel given a shift in spending habits,” wrote Cunningham.
These points are all good news for U.S. airlines as they near a full recovery from the pandemic. Most are expected to report strong results in the third quarter when travel demand was strong but capacity constraints — from staffing issues to air traffic control limits and aircraft delivery delays — kept airfares high. In September, United raised its third quarter revenue forecast a point to up roughly 12 percent compared to 2019, and Southwest honed its guidance to up 9-11 percent. And JetBlue Airways raised its unit revenue forecast by as much as three points to up 22-24 percent year-over-three-years.
“We are seeing some really great leisure strength into the fall,” JetBlue President Joanna Geraghty said at the Skift Global Forum in September. She added that corporate demand, particularly to and from New York, was also on the rise.
U.S. carriers are widely expected to report profits, though not record profits, in the third quarter. This follows similarly strong financial performance in the second.
But inflationary and other macroeconomic pressures are weighing on U.S. airlines even with robust demand. Costs are rising at accelerated levels driven, in part, due to the run up in labor expenses needed to address staffing issues. High fuel prices are also an issue; though these have eased somewhat with the recent declines in the cost of Brent crude. After peaking at over $129 per barrel in June, Brent spot prices closed at $94.42 per gallon on Thursday. It is unclear yet how the Organization of the Petroleum Exporting Countries’ decision this week to cut production rates will impact jet fuel prices.
Cowen & Co. analyst Helane Becker wrote on Thursday that she is watching closely how much airlines are recapturing higher expenses through higher airfares. Other items to watch include whether the number of leisure travelers buying up to premium seats and products is holding, and the pace of the corporate travel recovery since Labor Day in early September.
“We expect cautious optimism with a hefty dose of concern due to inflationary pressures on costs,” Becker wrote on her outlook for U.S. airlines’ third quarter calls.
Delta reports third quarter results first on October 13, followed by United on October 18, and American on October 20.
