5 Things to Watch for in US Airlines Earnings

U.S. airlines are having a beautiful summer heading into their second quarter. Demand for leisure travel remains as torrid as the temperatures, fuel prices have declined and hiring has mitigated most of the staffing shortages that plagued carriers last year at this time.

Overall traffic is back above pre-pandemic levels, with both the Memorial Day and July 4 holidays surpassing 2019 traveler volumes. U.S. airlines are projecting a record 257 million passengers for the three months ending Aug. 31.

Delta Air Lines is the first major U.S. airline to report, on Thursday, and many observers are expecting a record for the second quarter. Solid demand — despite pricey fares — coupled with jet fuel prices roughly 40 percent below the start of the year are likely to have several carriers topping Wall Street forecasts.

Here are five things worth watching for as the industry reports:

1. September (cue Earth, Wind & Fire)
Peak summer is the gravy train season for airlines: Vacationers fill airplanes, and high prices have done little to dent demand. September is the inflection point when students return to school and demand drops, with airlines’ schedules and fares (typically) both declining as a result. Southwest, for example, regularly drops a sizable fare sale in June for fall travel as a way to fill some seats early and to gauge post-summer demand. But while autumn often brings a slowdown, it’s not clear what will happen in 2023. Does high demand blunt the usual pattern, with consumer spending remaining strong? Will the consumer be tapped out and ready to park the suitcase? Management commentary about September and October demand will be scrutinized closely.

2. Business Traffic
Corporate and international travel remain below 2019 levels, and both are important for airline profitability. Most years, business travel gears up in the fall for professional conferences and other corporate activity as leisure travel recedes. Will that pattern finally return in 2023? Or will corporate travel managers, uncertain about economic conditions as the year winds down, likely to keep a lid on travel? Are airlines finally at a point in their recovery to reach some definitive conclusions about how much this category will be back to, and above, 2019?

3. Capacity & Fares 
Despite the boom in leisure air travel, U.S. airline capacity is constrained relative to economic growth. Fewer seats are flying in 2023 compared with what normal growth would dictate, hindered by too few pilots and new-aircraft delivery bottlenecks at both Airbus and Boeing. “The airline industry continues to run at a capacity deficit relative to the economy, resulting in pricing power,” Melius Research analyst Conor Cunningham wrote Monday in a client note. 

The state of capacity growth is an important factor for carriers’ schedules – and fares. “If we are going to grow this business and accommodate the volume of demand out there, we’re going to need more flights,” Airlines for America Chief Economist John Heimlich said in May, according to Airline Weekly.

4. Pilot Contracts
Three national carriers — Southwest, United and Allegiant — are in contract talks with their pilots, normally the highest-paid airline employees apart from senior executives. Pilots at American Airlines begin voting on their tentative agreement starting July 24. The shortage of pilots across the industry, and the decimation of regional flying in many smaller markets, has given pilots leverage in this round of negotiations. Management rarely discloses much about ongoing talks, but it might have some fresh thoughts about that expense.

5. New York, New York
The nation’s largest metro area has some unique aviation issues coming into focus this year. The Federal Aviation Administration warned in March that air traffic controller understaffing would create a challenging summer around New York, and the bureaucrats were right. Poor weather snarled United Airlines’ Newark, N.J., hub for nearly a week, with similar ugly operational effects at nearby LaGuardia and JFK International. The chaos left United contemplating schedule cuts at Newark. Any changes by the largest U.S. airline at one of its largest hubs is likely to carry competitive effects.

Another Big Apple issue is the outcome of a legal fight between American Airlines and the Department of Justice regarding American’s business partnership with JetBlue Airways. The latter carrier is ready to jettison the so-called Northeast Alliance in New York and Boston to win federal regulatory approval of its Spirit Airlines acquisition. But that leaves American with the tricky question of how to serve New York City — with plenty of repercussions for how rivals like Delta and Southwest respond.