A number of airlines including American (AAL), Spirit (SAVE), and Southwest (LUV) have warned about the impact of higher jet fuel costs. Third Bridge Global Sector Lead for Industrials Materials and Energy Peter McNally highlights three issues impacting the industry right now. The three issues McNally cites are the increase in international travel, costs, and capacity. Capacity has become an issue, he says, because now that suppliers are delivering planes, there are more seats, and that's putting "downward pressure" on fares. "Airlines have less pricing power now than they do at any point since the recovery began," McNally adds.
Video Transcript
BRAD SMITH: Airline stocks hitting some turbulence with several major airlines cutting guidance in recent weeks, largely due to higher jet fuel costs. American Airlines now expects third quarter earnings of $0.20 and $0.30 per share. That's sharply lower than its previous estimate of around $0.85 to $0.95 a share.
Low cost carrier Spirit now sees revenue between $1.24 billion and $1.25 billion in the third quarter. Southwest, United Airlines, and Alaska all issuing new guidance on how much they're expecting to spend on jet fuel.
Joining us now, we've got Peter McNally, Third Bridge Global Sector Lead for Industrials, Materials, and Energy. Peter, great to speak with you as always here. If I may summon back into the chat, Southwest specifically here. Because I think they gave a warning that was a little bit more telling about the consumer, especially on that low end here.
How much of a warning shot was that to the state of this kind of travel resurgence, that many of these CEOs had said is locked in place, is good to go. We are in a countercyclical recovery on that front?
PETER MCNALLY: Well, there's a few things going on here, you know, in the industry. One, I think we've seen in particular this summer, there's been a shift to international. People have been traveling domestically for a few years now since the recovery. And that's where we think we've seen the outperformance in major airlines like United, Delta, and American on their top line, serving those customers.
But costs as well is one more factor. And then the third thing that we haven't seen really in four years is capacity. And more planes are being put into service. Airlines have been aggressive in ordering. And finally, Boeing and Airbus are getting their supply chains together. These planes are being delivered. There's more supply of seats, and that's putting some downward pressure on fares here.
And we're going into a seasonally softer period for demand. So this is going to be the state of play we think for the next few months in the industry.
AKIKO FUJITA: Yeah. Peter, you know, I'm thinking back to last year when we saw really energy prices spike in a big way on the back of the Russia-Ukraine war. Airlines did raise their prices, and yet there was this continued demand from consumers who were in the middle of what we characterize as revenge travel. Is the airlines have that same pricing power this time around, even as they see their own costs add up? Because consumers, as you point out, aren't in the same place.
PETER MCNALLY: Now it's different now. The situation has eroded with these additional aircrafts that are coming into service. And yes, fares have gotten high for sure. And people do want to travel. We wouldn't argue that. And we are through at least on the leisure side in terms of passenger numbers where we were in 2019. Business still has a way to go and so does international. But airlines have less pricing power now than they do at any point since the recovery began.
BRAD SMITH: You mentioned something really interesting in why customers continue to book and that it's interactional. If more of the bookings are for an interactional-- excuse me-- purpose, then does that lead to a kind of leisure malaise here, of people who are just kind of booking travel for the sake of the experience of it all?
PETER MCNALLY: Well, look I mean, there's always a few things to consider here. But I think one thing that should not be underestimated in this is that airlines still don't have change fees. So it's allowing people to book and then have a lot more flexibility on when and where they go.
And I think what we were seeing earlier this year was people just booking to make sure that they got a seat, you know, frankly. And, you know, now at this point, like, there are more seats available, made available by these airlines with these new aircraft. And they've paid their labor, you know, whether it's pilots, flight attendants, you know, more money to get these planes in the air. But I think that's kind of the key part of the dynamic now.
AKIKO FUJITA: To what extent has the rough experience is probably putting it mildly what we've seen in the summer, airlines being canceled, the constant delays, I mean, how has that been eating into not just the experience but also this travel demand? I mean, have you seen a dent on the back of it? Maybe I'm just speaking from personal experience here.
But it is-- you have to wonder how frustrating it is to have to go through repeatedly in the airlines as well as the Department of Transportation has made it very clear, there is a rough patch that's happening right now partly because of staffing, but partly because of other factors as well.
PETER MCNALLY: It's been frustrating for sure. But people keep coming back. Our experts would argue this summer that the disruptions really were weather-driven. United was the big one this time. But if we roll back to last Christmas, the Southwest debacle was pretty much self-inflicted. It was an IT system that melted down. It's been something that's kind of plagued the company for years, that our experts would have been citing.
Prior to that, it had been getting pilots paid it off and trained to fly these things. But lately it's been more about weather. This could change as demand continues to grow. But people come back. And look, driving isn't that cheap and flying can get you there like pretty quick. But the underlying demand is still there.
BRAD SMITH: All right, Peter, we got to leave things there. Of course, we could continue to talk to you all day about this. Third Bridge Global Sector Lead for Industrials, Materials, and Energy. Peter, have a great weekend.