Domestic Demand Slowdown Impacts U.S. Airlines
The recent earnings season has brought about turmoil for U.S. airlines, resulting in a reevaluation of the industry’s outlook. A significant point of concern is the downturn in domestic demand, which has been highlighted by major carriers as they head into the second half of the year.
Pressure on Domestic Airlines Expected to Continue
According to Redburn analyst James Goodall, domestic airlines will continue to face pressure not only in the upcoming months but also in the years ahead. Goodall favors airlines that have a stronger presence in the international market. Considering this perspective, he downgraded Southwest Airlines (ticker: LUV) from Neutral to Sell and American Airlines (AAL) from Buy to Neutral in a note released on Monday.
American Airlines Exposed to Competitive Domestic Market
Among the U.S. airlines, American Airlines has the highest exposure to international travel, but it also faces significant competition in the domestic market. Goodall emphasized this point, leading to the downgrade of American Airlines.
United Airlines Upgraded, Delta Air Lines Maintains Buy Rating
In contrast, Goodall upgraded United Airlines (UAL) from Neutral to Buy due to its robust international presence. Additionally, he maintained a Buy rating on Delta Air Lines (DAL).
Underperformance of Domestic Airlines During Earnings Season
The recent earnings season has highlighted the underperformance of U.S. airlines that have a stronger focus on domestic operations compared to their counterparts with more international exposure. This can be attributed to various factors, including the outstanding results seen during the comparable period in 2022 and the surge in demand for international travel, which has come at the expense of domestic journeys.
The Future of the Aviation Industry: Challenges and Opportunities
According to industry expert Callum Keown, the aviation industry is currently facing short-term challenges such as growing domestic capacity and structural cost inflation. This has put significant margin pressure on airlines, leading to continued pricing pressure on domestic routes. However, despite these hurdles, there is optimism for the international market.
Keown predicts that international flights will perform more strongly due to a rationalized global fleet. In fact, stock market data reflects this divide between domestic and international exposure. Airlines with a strong overseas presence like United and Delta have seen their stock prices rise by over 35% in 2023. American Airlines, the third carrier in this category, has also experienced a solid 25% increase in its stock price.
On the other hand, major domestic carriers have struggled in comparison. Southwest Airlines has declined by 2.8% since the beginning of the year, while Spirit Airlines and Frontier Group have experienced even larger declines of 17% and 21% respectively. JetBlue Airways, however, has managed to stay afloat with a modest 3.1% increase.
Despite these challenges, Spirit Airlines’ CEO Ted Christie provided some hope for domestic carriers. He expects a shift in demand towards domestic travel once the summer season ends and children return to school. This anticipated change should lead to a more normal pricing and demand environment during the peak holiday travel periods in the fourth quarter.
Overall, the aviation industry is facing both near-term obstacles and long-term opportunities. While domestic carriers struggle to offset cost inflation, international airlines with a rationalized fleet are expected to perform well. With shifts in demand on the horizon and the potential for a more balanced market, the future of the aviation industry remains uncertain yet promising.
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