Airlines got too confident, and now they are paying the price despite record-breaking travel
29.06.2024 - 13:33
/ insider.com
/ Robert Isom
/ Henry Harteveldt
/ Bob Jordan
Making money in the airline industry has never been easy.
It's a capital-heavy business with the constant need to expand and innovate while simultaneously managing ever-changing demand and costs.
Expensive fuel, maintenance, and labor don't help, nor do unpredictable setbacks outside the airline's control, like pandemic travel bans and production slowdowns at planemaker Boeing.
Despite the challenging environment, 2024 is still set to see record-breaking passenger numbers, according to the International Air Transport Association, or IATA,
With so many people traveling, US airlines were poised for success. Some, like Delta, have found it. But across the industry, many airlines are struggling to turn profits thanks to issues like overcapacity, unrelenting competition, and unexpectedly high costs, according to experts.
Take Southwest, for example, which in June cut its forecasts and now expects revenue per seat mile — a key financial metric for airlines — to fall by up to 4.5% where it had previously expected 1.5% to 3.5%.
Before that, American in May warned it expected the same metric to fall by 5% to 6% compared to last year. Its earlier prediction was 1% to 3%.
Across the board, airlines have trailed the benchmark S&P 500 index with more debt than the average publicly traded company and thinner margins.
Travel analyst Henry Harteveldt told Business Insider that thining margins are, in part, because airlines added too much to the market too fast amid confidence in the soaring demand and now can't sell all of those seats.
Reuters reported American hurt its pricing power after aggressive growth in its domestic market. The airline also missed out on revenue from corporate customers due to a flawed ticket sale strategy it has since admitted was a mistake to adopt.
"We're seeing softness in customer bookings relative to our expectations that we believe is in part due to the changes that we have made to our sales and distribution strategy," American CEO Robert Isom said during a May conference.
Southwest also cited its struggle to predict demand as part of its revenue problem. And, unlike ultra-low-cost carriers, Southwest doesn't charge extra for ancillaries like bags or seats — another missed revenue opportunity.
In fact, activist firm Elliott Investment Management recently pumped nearly $2 billion into Southwest, questioning strategies like its lack of add-on fees and calling for a board shake-up and the firing of Southwest CEO Bob Jordan.
Part of the industry's overcapacity problem is because lucrative business travel still hasn't completely rebounded since the pandemic, Harry Kraemer, former CFO and CEO of healthcare firm Baxter International, told BI.
Corporations aren't spending as much on last-minute