American Airlines saw many of the positive trends of the past few quarters continue through the quarter ending in March, according to new guidance issued Wednesday. Capacity and revenues grew at the upper end of forecasts, and costs dropped as expected.
That is good news for the Fort Worth, Texas-based airline, and the U.S. industry that begins reporting first quarter earnings on Thursday. Delta Air Lines will kick off earnings season. The three months ending in March are historically the weakest of the year, with January and February troughs of travel demand. March, with spring break and Easter-related travel, typically makes the quarter. American’s updated guidance demonstrates that United Airlines, which notably said it would miss its estimates in March, might be an outlier rather than the norm for the period.
American’s numbers for the first quarter look good: Unit revenues, measured by total revenue per available seat mile (TRASM), increased roughly 25.5 percent year-over-year and capacity 9.2 percent, the airline said Wednesday. Unit costs, or costs per available seat mile, excluding fuel decreased roughly 1.5 percent compared to 2022. The numbers were, in part, driven by American’s large Latin American business where travel demand peaks in the first quarter. The carrier will report its second-quarter results later this month.
All good, right? Yes and no, say Wall Street analysts.
The second quarter is expected to be much more mixed for U.S. airlines. Domestic demand growth, which has surged since last spring, appears to be slowing. Data from Bank of America suggests a 5.5 percentage point slowdown in domestic net sales since mid-March. On the other hand, international demand growth continues to improve, especially in markets where there were travel restrictions last year, for example Asia. This setup could benefit the U.S. Big Three — American, Delta, and United — with their large international networks, more than their domestic-focused competitors, like Alaska Airlines and Southwest Airlines.
Jamie Baker, an analyst at J.P. Morgan, wrote Tuesday that slowing U.S. domestic demand growth is “nothing to be alarmed about” because demand in the second quarter of 2022 was “overheated.” He cited the surge in travel after the Omicron variant, as well as other unique market dynamics, that drove the significant gains a year ago. This could make year-over-year growth comparisons challenging but does not mean that revenues, which in many cases were well above pre-pandemic levels a year ago, or demand are falling.
“We do not view this as definitive evidence of cooling travel demand; rather, we believe it largely reflects geographic trends beginning to normalize after last year’s period of significant abnormality,” Baker wrote. A leveling off of U.S. domestic demand may be a better way to describe the situation.
Melius Research analyst Conor Cunningham wrote Monday that strong U.S. domestic pricing continues. One driver is the persistent limits on capacity growth, including air traffic control staffing issues in the New York and Washington, D.C., markets, the captain shortage at regional airlines, and delivery delays for new planes from Airbus and Boeing. Basic economics tells us that when supply (airline capacity) is constrained and demand remains strong — even if it’s not growing as fast as it was — prices will stay high, or even go higher.
“Top-line growth will be internationally driven given easy comparisons over the Atlantic and to Asia,” Cunningham wrote. He estimated that U.S. airline revenues will rise roughly 10 percent year-over-year during the June quarter.
U.S. domestic airline capacity is scheduled to increase nearly 9 percent compared to 2022 in the second quarter, according to Diio by Cirium data. And, compared to 2019, scheduled capacity is up nearly 3 percent.
Travel demand in the U.S., measured by passenger traffic, surpassed pre-pandemic levels for the first time in February. The latest data from IATA shows domestic traffic was up a little less than 1 percent from 2019 levels that month.
Overall international capacity to and from the U.S. is up 24 percent year-over-year, but down roughly 10 percent from 2019, in the second quarter, Diio data show. Of the U.S. Big Three, American and Delta will fly less international capacity, and United 6 percent more capacity in the March quarter compared to before the pandemic.
“This earnings season may prove a tale of two cities, with the best of revenue times being enjoyed by the Big Three, with far more muted revenue guides emerging elsewhere,” wrote Baker.