Record-breaking numbers of passengers are traveling this summer. On the Friday before Memorial Day, universally considered the kick-off to summer, almost 3 million people were screened at U.S. airports.

The Transportation Security Administration (TSA) said May 24 beat the previous airport-packing record set last year on the Sunday after Thanksgiving, screening 2.95 million people “Officers have set a new record for most travelers screened in a single day!” the TSA tweeted triumphantly. “We recommend arriving early.”

For this summer, estimates are that 271 million travelers will fly US airlines between June 1 and August 31, smashing the record of 255 million set last summer.

World-wide, airlines are projected to carry 4.7 billion passengers in 2024, finally breaking the pre-COVID 2019 record of 4.5 billion. Airline revenue is expected to rise 7.6% to a record $964 billion in 2024, something that won’t surprise anyone who has priced airline tickets this year.

So with all this good news, why did American Airlines plunge 14% in the stock market this week? For that matter, why are US airline stocks still far from their five-year highs, mostly reached in 2019 and early 2020?

The same IATA report that noted that world airline revenues would reach almost a trillion dollars ($964 billion) in 2024 said that airline profits would reach only a tiny fraction of that. Airline net profits for 2024 were projected at just $25.7 billion, or 2.7% of the net profit margin.

“While the recovery is impressive, a net profit margin of 2.7% is far below what investors in almost any other industry would accept,” said Willie Walsh, IATA’s Director General in December 2023. “The average airlines will retain just $5.45 for every passenger carried. That’s about enough to buy a basic ‘grande latte’ at a London Starbucks. But it is far too little to build a future that is resilient.”

Walsh pointed to “onerous regulation, fragmentation, high infrastructure costs and a supply chain populated with oligopolies.” This was clearly a dig at the Boeing/Airbus airliner manufacturing duopoly. While Boeing’s manufacturing problems with the 737MAX are well-known, Airbus also has a significant backlog for its A321 family.

We spoke with Savanthi Syth, CFA, Managing Director for Global Airlines & Advanced Air Mobility at Raymond James this week. She noted, “At the heart of the matter is that costs have risen sharply, and fares haven’t kept up despite strong demand recovery, [with leisure travel above 2019 and business travel back to 2019 levels] due to oversupply relative to the new cost structure.”

Ms. Syth added, “Airline labor costs have risen dramatically, and fuel is higher than 2019. These are the two biggest cost components for U.S. airlines, accounting for more than half. In addition, air traffic control (ATC) staffing shortages have led to operational inefficiencies and aircraft parts supply chain issues have led to delivery delays and extended maintenance times that are also driving up costs.”

American Airlines, for example, posted record-breaking revenues of $12.6 billion dollars in the first quarter of 2024, but still recorded a loss of more than $300 million, primarily driven by operational costs.

This week, American stock plunged 14% after the airline changed guidance to reflect a unit revenue cut.

American Airlines CEO Robert Isom noted on a webcast that American’s unit revenue cut was from a “combination of softer domestic environment and American’s performance within that environment,” according to a Raymond James note.

After the revenue cut announcement, CEO Robert Isom fired the airline’s Chief Commercial Officer, Vasu Raja. A Bain & Co. report pointed to issues with his “modern retailing” strategy, which sought to move customers away from booking through travel agencies and towards direct bookings on American’s website and app.

American cut back its sales department, as part of this strategy, but the urge to trim travel agencies out of the picture was apparently not a success. The Bain report commissioned by American highlighted concerns from corporate travel advisers about the impact of the shift. As Simple Flying put it, “American Airlines Shot Itself In The Foot” with its distribution strategy.

Stockholders of many US airlines are unhappy, with most US airlines nowhere near their five-year highs. American Airlines stock has suffered since the pandemic, dropping from a high of 33.79 on July 17, 2019, to just 11.44 on May 30, 2024. Southwest Airlines also trades at less than half of its five-year high. Southwest reached 63.42 in April 2021, and closed at 26.84 on May 31, 2024. Even industry darling Delta, trading around 50 this week, has yet to reach its January 2020 high of 59.

As Helane Becker, managing director and senior research analyst at TD Cowen puts it, “The issue isn’t one of demand.”

According to Becker, “In American’s case, they are managing costs well, but the revenue is weaker because of excess capacity in a lot of their markets. They are the smallest of the three largest airlines in international travel. They focus on domestic, and that’s an issue for them right now, when there are too many seats in markets they fly.”

Becker believes that “people travel differently now than they did prior to 2020.” For the airlines, which means “strong demand during the peaks but demand during off-peak periods is less robust.”

“Summer will be strong, but there is a shift away from domestic travel to international travel,” Becker predicts. She says that in Latin America and Europe, a lot of new industry capacity has come in . “European airlines have restored capacity on the North Atlantic and LATAM and Avianca emerged from Chapter 11 and are growing again. This has resulted in more choices for consumers and the result has been lower fares” internationally.

Norse Atlantic, for example, is offering non-stop flights from the US to Europe starting at $239, which also drives down the fares of competitors.

Ms. Syth of Raymond James notes, “Strength in premium demand (due to better yield improvements in that segment as well as increase product availability and merchandizing by airlines) is helping airlines that have a premium offering relative to those that do not.”

So airlines with significant investment in First and Business Class products like Delta and United, which recently reiterated its profit guidance, are doing relatively well in the stock market, while all-economy class Southwest currently trades at less than half of its five-year high.

Will continuing strong demand ultimately translate to airline profits and smiling stockholders? The third-quarter post-summer report card may reveal if the profitless recovery will come to an end.

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