The recent earnings season has been challenging for U.S. airlines, with low-cost carriers focusing on domestic travel feeling the pinch. Unfortunately, the situation is not looking any better.
Spirit Airlines, identified as SAVE in the stock market, only added to concerns over a slowdown in domestic demand when it released its earnings report early on Thursday. At the same time, another blow was dealt to Southwest Airlines (LUV), as it faced its fifth downgrade since announcing its results a week ago.
Analysts from Jefferies downgraded Southwest Airlines’ stock from Hold to Underperform and highlighted a clear divide in the airline sector: “the haves” (international and premium carriers) and “the have-nots” (low-cost domestic carriers).
In a note issued on Thursday, Sheila Kahyaoglu and her team of analysts stated, “The writing is on the wall for domestic carriers, with Southwest missing out on the stickier premium customers, while the ultra-low-cost carriers eat away at more price-conscious consumers.”
Interestingly, Spirit Airlines felt the impact of the domestic slowdown earlier than many of its competitors, who only recently revealed signs of revenue decline in the current quarter. On the other hand, airlines such as Alaska Air, Southwest Airlines, American Airlines, and Delta Air Lines reported record revenue for the second quarter.
Unfortunately, Spirit Airlines fell short of both earnings and revenue estimates. CEO Ted Christie attributed this to softer demand during the peak summer period, stating that it had resulted in lower fare levels on their routes. Consequently, fare revenue per flight segment fell by 20% compared to the same period last year.
Domestic and International Travel Trends in the Airline Industry
The airline industry is currently experiencing two significant trends that are shaping the demand for travel. Firstly, the second quarter of 2022 saw a surge in domestic travel, making it a difficult period to compare with. Secondly, Americans are increasingly opting for international trips this summer over domestic flights.
According to industry experts, these trends are expected to continue throughout July and potentially into the fall season. However, there is hope on the horizon for domestic-focused U.S. airlines. As the summer comes to an end and children return to school, it is anticipated that demand will shift back towards domestic travel.
This shift should result in a more balanced pricing and demand environment during the peak holiday travel periods in the fourth quarter. Analysts predict a return to normalcy for the industry during this time.
Unfortunately, Spirit Airlines recently reported adjusted earnings of 29 cents per share on revenue of $1.43 billion for the second quarter, missing estimates for both metrics. Analysts had anticipated earnings per share of 39 cents on revenue of $1.47 billion.
Consequently, Spirit Airlines’ stock fell 4.9% on Wednesday and is expected to open 1.6% lower in premarket trading on Thursday.
Despite the airline’s optimism for the fourth quarter, these earnings misses, along with the commentary on demand and other market indicators, highlight the challenges faced by domestic airlines. As a result, industry optimism is currently being overshadowed.
