Travel is up. Airline outlooks are down.
Passenger traffic south of the border has smashed previous records. In the first half of 2024, U.S. Transportation Security Administration screenings were up 6% from last year. Canada is also seeing a surge in travel demand.
So why are airlines, including Air Canada, performing below financial analysts’ expectations?
Robert Kokonis, president of Toronto-based AirTrav Inc., recently told Open Jaw that Delta’s second-quarter earnings showed yield (passenger revenue per mile) was falling due to “too many seats chasing demand.”
Citing lower yields and lower demand than expected, Air Canada this week said it substantially lowered expectations for its second-quarter financial outlook, which is due for release in early August. But AC is far from alone. American Airlines, which will issue its latest financials on 25JUL, has lowered its revenue forecasts for the second quarter of this year. And Lufthansa recently slashed its 2024 earnings guidance.
While plenty of customers are flocking to travel destinations worldwide, airlines are finding an excess supply of seats in the price-sensitive end of the market, which has forced them to discount fares to fill their planes, the Globe and Mail and Reuters report.
Airline executives attributed the overcapacity to an overoptimistic view of travel demand, which has been robust by most standards.
“It was just that airlines were hoping that it (demand) was going to be even stronger,” Alaska’s CFO Shane Tackett said in an interview.
In addition to the discounting pressure, new labour contracts, higher lease rates and maintenance costs have driven up the industry’s operating expenses.
Raymond James analyst Savanthi Syth said in a note Friday that the third quarter's outlook for airlines is “clear as mud.”
CNBC said Syth cited headwinds such as potentially weaker spending from coach-class clientele, the impact of the Paris Olympics on some European bookings, and possible changes in corporate travel demand.
“The domestic supply and demand imbalance has led to a weaker domestic pricing environment than we had forecast,” American Airlines CEO Robert Isom said recently. “There’s more discounting activity than we saw a year ago. Now, industry capacity is expected to come down in the second half of the year, and that should help.”
In a press release issued 22JUL, Air Canada said its adjusted earnings were “largely driven by the lower yield environment, lower-than-expected load factors for the second half of the year and competitive pressures in international markets. It also reflects our assumptions including those relating to the price of jet fuel and a weakened Canadian dollar against the US dollar.”
The airline said it’s also facing supply chain pressures, evolving market conditions and ongoing geopolitical issues. But officials noted that Air Canada “continues to see a healthy demand environment,” and noted that second-quarter operating revenues would represent a record for a second quarter, with load factors remaining above historical averages.
In sports terms, the airlines are going through a mid-season slump. But the playoffs are months away, and there’s plenty of time to turn things around.
