The Airline/Airport Growth Challenge

Four major U.S. airlines have now reported their third-quarter results, including United, American, and Alaska Airlines last week. Together with Delta’s results the week before, the latest disclosures make several trends crystal clear. One is that longhaul international demand is having a moment, delivering extraordinary profits to carriers with overseas exposure. Domestic demand, however, though certainly not weak, has clearly softened from last year’s highs, especially since the start of autumn. Premium strength is evident across most markets, international and domestic. (It’s not just business travelers buying premium seats anymore, but leisure travelers too). On the cost side, discomfort is growing with another move upward in fuel prices, combined with non-fuel cost inflation. In addition, airlines still face shortages of planes and people, mitigating competitive pressures, yes, but also obstructing efforts to lower unit costs via growth.

For United, heavy overseas and premium exposure has it gloating about new industry realities that greatly disfavor low-cost carriers. It sees a “shakeout” coming sometime next year, implying existential trouble for Spirit (which hasn’t yet secured regulatory approval for its embrace of JetBlue) and Frontier. It perhaps portends problems for Southwest and JetBlue as well, in United’s world view. It aims to facilitate their misfortunes by replacing smaller planes, including regional jets, with an ambitiously large armada of large-gauge 737 Maxes and A321neos, thereby denying LCCs a big unit cost advantage. Far from counting on cost competitiveness alone though, executives in Chicago are striving for supremacy in the revenue realm, adding premium seats, expanding from big-city hubs, teasing big changes to United’s loyalty plan, brandishing Basic Economy fares as a weapon against LCCs, adapting the airline’s network to meet the rise in leisure travel, and continuing the march on markets abroad.

If investors were impressed, they didn’t show it. United’s stock tumbled on more immediate fears, specifically rising fuel prices and the latest Middle Eastern conflict. The latter has already forced United to suspend its four routes to Tel Aviv (from Chicago, Newark, San Francisco, and Washington, D.C.). Will the conflict make Americans more reluctant to travel abroad more generally? Will – even more generally – the current intercontinental travel boom peter out for more mundane reasons, like a softer economy or the exhaustion of post-pandemic “revenge travel?”

For American, problems are of a different nature. Its poor third-quarter results relative to United and Delta reflect its lower exposure to intercontinental and premium markets. Many of its longhaul planes, for example, feature fewer business-class seats than United’s planes. American also points to its less lucrative co-branded credit card deals with banks, costs tied to its earlier investments in new airplanes, and delays in optimizing its regional feed network. It also lost its relationship with JetBlue. Keep in mind too that third quarters aren’t quite so special at American given its network geography, with hubs throughout the U.S. south (Charlotte, Dallas-Fort Worth, Miami, and Phoenix). But these hubs, American argues, are all in booming Sun Belt economies. At the same time, American says it will eventually catch up in the premium race, with plans to grow its premium seating more than 40% from now through 2026. It aims to make gains in the longhaul arena too, as new planes like Airbus A321XLRs start arriving late next year. Lackluster credit card deals notwithstanding, American’s AAdvantage plan is a potent weapon. So is its success in getting more and more customers to book tickets directly through its own sales channels. Some big questions remain though, like whether it can ever make money in Chicago.

The domestic U.S. demand slowdown was most evident for Alaska, which started seeing a drop-off in September. Turning to Europe, Icelandair reported red-hot summer margins. But what happens now that the weather is cooling? Winter, alas, is the aviation curse of northern Europe.

No need for Pegasus to curse, with demand still holding up well. But it’s not quite as strong as it was last year, its CEO says. Next year, Thai Airways hopes to fly out of bankruptcy. For Air India, this year is a time of transition, demonstrated again last week by the unveiling of a new brand image for Air India Express.

Things are about to get really interesting this week as a parade of major airlines report for the third quarter. More U.S. carriers will step into the limelight, Southwest included. Some big European players will announce as well, none bigger than IAG.