Airlines say lower domestic fares threaten record revenue growth

Sky-high airfare was a boon for U.S. airlines coming out of the Covid-19 pandemic.

But airline executives are now seeing lower domestic fares as carriers’ schedules swell and customers opt for trips abroad over closer destinations that were popular during the pandemic.

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

The NYSE Arca Airline Index is down more than 6% this week, slimming its gains to 37% so far this year. Airline shares have largely outpaced the S&P 500 this year, which is up marginally this week and has advanced 18% in 2023.

Domestic U.S. airfare is currently averaging $258 for a round-trip ticket, down 11% from last year and 9% from 2019, according to fare-tracking company Hopper. International tickets, in comparison, are up 8% from 2022 and are 23% more expensive than 2019, averaging $958. The latest U.S. inflation report showed a sharp drop in airfare.

The shift marks a new chapter in airlines’ recovery from the pandemic and a potential challenge to domestic-focused airlines after the peak summer travel season, which traditionally fades in mid-August when schools reopen.

That’s happening while corporate travel demand still hasn’t recovered to pre-pandemic levels.

Southwest on Thursday said it expects unit revenue to drop as much as 7% in the current quarter from a year ago on a 12% increase in capacity.

An airline’s revenue per available seat mile is a measure of how much a carrier generates compared with how much capacity it is offering.

The Dallas-based airline blamed its forecast on faster-than-usual capacity growth. Overall, Southwest still expects record revenue for the quarter, but estimated unit costs, excluding fuel, would rise between 3.5% and 6.5% from the same period in 2022.

Southwest said it would refocus its network next year to adapt to changing travel patterns after the pandemic, such as weak business-travel demand growth. The airline’s shares dropped more than 9% Thursday, wiping out its 2023 gains.

Meanwhile, Alaska Airlines this week forecast third-quarter revenue ranging from flat to up 3% and unit revenues down about 9% “at the midpoint,” with capacity up as much as 13% compared with last year.

“As we approach the rest of the year and beyond, it is clear our environment is evolving as domestic leisure fares have recently started to come down from their peaks,” Alaska Airlines CEO Ben Minicucci said on an earnings call Wednesday.

American Airlines last week said it expected unit revenues for the current quarter to fall as much as 6.5% from a year ago, but it noted full-year unit revenues would be up in the low single digits. The airline still forecast a profit for the summer quarter.

Delta Air Lines and United Airlines‘ very upbeat forecasts that topped expectations reiterated strength in international revenue, particularly trips to Europe and Asia, as they ramp up flights.