PRISM Consumer Airline and Travel Insights: The Seatbelt Sign Is On.

Airline commentary has been making headlines as quarterly earnings are being released and economic reports are providing additional travel insights to the investment community. June’s CPI report that surprised estimates and reported a drop in prices for the first time since the pandemic, specifically mentioned airfares to be a segment that contributed to the m/m decline in prices. Additionally, the term “consumer resilience” is being scrutinized and debated between bulls and bears. Regardless how much or little one believes in the strength of consumers financial health, various reports across the industry continue to echo that people are still traveling but how they are traveling may be a better indicator of the true financial health of the US consumer.

So far here is what the airlines who have reported earnings have had to say:

As always, last week Delta Airlines (DAL) kicked off earnings as one of the first reports for the Q2 season. The airline reported near record revenue of $15.4Bn however, management notably cited that the Paris Olympics is costing the airline $100M as tourists are not traveling to the city this summer, if they are not attending the event. This headwind is expected to echo across the industry. Also impacting airlines is lower fare discounting driven by competition from low-cost carriers. Delta cited the discounted ticket prices are eating away at profits as rising fuel and other operational costs are hitting the bottom line. This week, Fitch upgraded Delta out of junk bond territory to investment grade status again with a BBB- due to its “considerable improvement”, since the pandemic. Delta was downgraded to junk in 2020, when Covid-19 disrupted the travel industry.

Due to Delta’s report indicating low fare discounting was eating into profits, investors may have increased their low-cost carrier long positions however, Spirit Airlines (SAVE) lowered their second quarter outlook on weak non-ticket revenue. The company’s Q2 guidance was included in an announcement on Tuesday regarding the new appointment to its Board of Directors. Spirit now projects $1.28B in Q2 revenues vs prior $1.32B – $1.34B, also disappointing consensus (FactSet $1.33B). However, the estimated ticket revenue per segment remains intact with previous expectations. The underperformance in non-ticket revenue is being attributed to incremental pressure on ancillary pricing as competition heats up and consumers no longer care to spend extra on baggage and food. Shares fell to an all-time low on the report as guidance on net income also was revised to ($198M) vs prior guidance ($184.0M) and FactSet ($127.4M).

Yesterday after the close, United Airlines (UAL) reported their Q2 earnings as all eyes were waiting on what the direct competitor to Delta would share. A resounding echo was heard as the company cited pressure from industrywide discounting and lowered its outlook despite its Q2 report that topped EPS estimates, saw profits jump by 23% and referenced strong travel demand. Q2 EPS came in at $4.14 vs FactSet $3.93 while revenues slightly disappointed at $14.99Bn vs FactSet $15.04Bn. Q3 guidance was dismal as the company lowered its EPS outlook to $2.75-3.25 vs FactSet $3.38. However, FY EPS guidance was reaffirmed as United’s management believes mid-August to be an inflection point when industry-wide oversupply eases, positioning United as the best in its class to benefit. The airline also reiterated Delta as it relates to impact from rising fuel costs. The carrier’s jet fuel consumption rose by about 72M gallons or roughly 7% from the second quarter of last year equating to a 4% rise in its annual fuel cost.

While these company announcements have reaffirmed economic reports that travel demand is still strong and consumers are spending, it also indicates that consumers are protecting their bottom dollar as Spirit has cited its extra fees are no longer being entertained. This also begs the question related to consumers financial health, as premium carriers are forced to lower ticket prices to compete and inflationary pressures still exist, “Is travel demand robust only because ticket prices are forced to remain low?” Additionally, would consumers still be spending on ancillary items such as travel if premium carriers were still able to charge higher prices? The health of the consumer may not be as rosy as the robust travel demand headlines indicate.

Upcoming earnings reports next week from American Airlines (AAL), Southwest Airlines (LUV) and Spirit should provide further answers and insights to these questions as airlines strategize how to continue to compete without impacting their profits and consumers keep their seatbelts fastened.