Investor concerns grow as US airlines face uncertain future
Investors worry about the future of U.S. airlines as concerns about a weakening economy and rising costs overshadow the ongoing travel boom. This has led to a decline in airline stocks, despite positive earnings reports indicating strong consumer demand for travel.
United Airlines saw its shares drop by about 10% after forecasting lower-than-expected fourth-quarter profit due to increasing expenses.
Brian Mulberry, client portfolio manager at Zacks Investment Management, highlighted the impact of demand on airline profitability: «It's really a demand-driven business. If there's less demand, then obviously less sales means less profitability.»
Delta Air Lines, which had previously set a goal of generating over $7 per share in profit next year, is also facing challenges in controlling operating costs.
Some analysts now view this target as aspirational. Consequently, Delta's shares have declined by 10% this month, despite posting better-than-expected quarterly earnings. While both United and Delta have reported that travel demand remains strong, a significant decrease in airfares compared to the previous year suggests that airline pricing power has reached its peak.
The decline in ticket prices raises concerns about how airlines will offset rising costs.
Delta CEO Ed Bastian expressed confidence in the industry's ability to pass on increased operating costs to consumers, but analysts suggest that consumers' reduced tolerance for high fares, coupled with the depletion of pandemic savings and high interest rates, may pose challenges. Mulberry warned that airlines could experience a more significant negative impact if there is a downturn in demand, as their operating costs have significantly increased.
