Record revenue growth threatened as airlines lower domestic fares

The Covid-19 pandemic provided a boost to U.S. airlines with sky-high airfare.

However, airline executives are now witnessing a decrease in domestic fares as carriers expand their schedules and customers choose trips abroad instead of popular destinations that were closer during the pandemic.

Southwest Airlines, Alaska Airlines and American Airlines are among the carriers that have projected slower revenue growth or weakness for the third quarter, despite strong demand.

The NYSE Arca Airline Index has declined over 6% this week, reducing its gains to 37% thus far in the year. Airline stocks have mainly outperformed the S&P 500 this year, which has seen a slight increase this week and has risen by 18% in 2023.

Currently, the average price of domestic U.S. airfare for a round-trip ticket is $258, 11% lower than last year and 9% lower than 2019, according to fare-tracking company Hopper. In comparison, international tickets are up 8% from 2022 and 23% more expensive than 2019, with an average price of $958. The latest U.S. inflation report revealed a significant decline in airfare.

This shift marks a new phase in the recovery of airlines from the pandemic and may pose a challenge to domestic-focused airlines after the peak summer travel season, which typically dissipates in mid-August when schools reopen.

Meanwhile, demand for corporate travel has still not fully rebounded to pre-pandemic levels.

Southwest Airlines announced on Thursday that it anticipates a decrease in unit revenue of up to 7% in the current quarter compared to the previous year, despite a 12% increase in capacity.

A carrier’s revenue per available seat mile measures the amount of revenue generated in relation to the capacity offered.

The airline, based in Dallas, attributed its forecast to accelerated capacity growth. Overall, Southwest still expects record revenue for the quarter, but forecasts that unit costs, excluding fuel, will rise between 3.5% and 6.5% compared to the same period in 2022.

Southwest stated that it will readjust its network next year to adapt to changing travel patterns after the pandemic, such as weak growth in business travel demand. The airline’s shares fell over 9% on Thursday, wiping out its gains for 2023.

Meanwhile, Alaska Airlines forecasted third-quarter revenue to remain flat to a 3% increase, with unit revenues expected to decrease about 9% at the midpoint and capacity increasing by as much as 13% compared to the previous year.

“As we continue through the remainder of the year and beyond, it is evident that our environment is evolving as domestic leisure fares have recently started to decline from their peaks,” said Alaska Airlines CEO Ben Minicucci on an earnings call Wednesday.

Last week, American Airlines announced that it anticipated a decrease in unit revenues for the current quarter of up to 6.5% from the previous year, but noted that full-year unit revenues would show a slight increase. The airline still expects to make a profit for the summer quarter.

Delta Air Lines and United Airlines have provided very optimistic forecasts that have exceeded expectations, highlighting the strength in international revenue, particularly trips to Europe and Asia, as they increase the number of flights.