American Airlines Struggle Amid U.S. Economic Slowdown
American Airlines (NASDAQ: AAL) Group Inc and United Airlines Holdings (NASDAQ: UAL) Inc are experiencing the strongest consumer demand in three years. Still, analysts and investors are unsure of when the good times will end.
Consumer demand slows down as the earnings season gets underway on Thursday. Hence, Investors are interested in learning how carriers intend to balance increased expenses and maintain profit. The airline sector has depended on strong demand to offset inflationary pressure with higher tickets since it is dealing with rising fuel and labor costs.
As it expects higher ticket prices to balance an increase in operational expenses, American Airlines on Tuesday forecasted better profit in the third quarter. However, the Texas-based airline made no comments on the patterns in bookings. One of the major factors driving an increase in U.S. consumer prices has been an increase in airline rates. They were up 33% year over year in August.
What Are the Airlines Facing?
The industry’s pricing power is in jeopardy due to the Federal Reserve’s aggressive interest rate increases. It should reduce inflation by reducing demand and delaying economic development. Next year, Jefferies analysts see a significant decrease in industry sales. When the Fed aggressively targets airline costs as a component of inflation, they stated in a letter that they struggle to be bullish on a pricing narrative.
This year, the NYSE Arca Airline index has fallen 38% due to these concerns, detracting attention from what should be the greatest profits performance in the sector in three years.
After the Fed announced its third 75 bps interest rate hike last month, Daniel McKenzie, an analyst with Seaport Research Partners, revised his projections for major airlines’ 2023 earnings. Carriers have downplayed demand worries by claiming that post-summer travel bookings have not slowed down. After Labor Day, which signifies the unofficial end of the U.S. summer season, travel demand tends to decline. Airlines, however, claim that travel reservations have been steady thus far.
