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Airlines Slash Prices to Convince Americans to Vacation Closer to Home

2023-08-03 17:59
JetBlue Airways Corp., Alaska Air Group Inc. and other US carriers expected the post-pandemic travel boom to send
Airlines Slash Prices to Convince Americans to Vacation Closer to Home

JetBlue Airways Corp., Alaska Air Group Inc. and other US carriers expected the post-pandemic travel boom to send ticket prices soaring this summer. Instead, they’re getting battered.

Travelers are showing an unusually strong preference for international trips, forcing domestic-focused carriers to discount prices. At the same time, many of them are facing higher costs from new labor contracts, flight disruptions and inflation.

As a result, JetBlue has slashed its yearly outlook. Southwest Airlines Co. and others have signaled they’re under pressure — a reversal from a few months ago when industry leaders promised high demand would endure. While domestic ticket sales may pick up again in a few months, with holidays encouraging people to take trips closer to home, it’s still been a tough reality check and a sign the end-of-lockdown travel frenzy is cooling for some.

“If you don’t cater to premium, if you can’t bank on loyalty and if you don’t fly internationally, this year’s third quarter is likely to disappoint,” Jamie Baker, a JPMorgan Chase & Co. analyst, said in a report.

There are a number of reasons why travelers have become especially enamored with trips abroad. In particular, looser Covid-19 restrictions mean for the first time in years Americans can visit far-flung destinations without expensive tests and the threat of lengthy quarantines.

The shift has been larger than the industry expected, and occurred after plans to boost available seats were already in motion. That’s weighed on prices. US round-trip fares are down about 11% compared with 2022 and 2019, and will remain slightly below 2019 levels until the winter holidays begin and carriers are able to boost fares as demand increases, according to booking app Hopper.com.

Adding to the pressure, Frontier Group Holdings Inc., a major discount carrier, is increasing capacity by 23% this quarter, compared to a year ago.

Lower Expectations

The tougher environment was a major reason JetBlue slashed its adjusted profit outlook to between 5 cents and 40 cents a share, from its earlier outlook of as much as $1. It also said it won’t earn as much this quarter as analysts had estimated.

Fares that were “really strong” through June have declined from record levels in 2022, Alaska Airlines said last week, but remain above pre-pandemic prices. It forecast revenue this quarter will be flat to up 3%, with a midpoint below Wall Street’s expectations.

“It’s not that people aren’t traveling, it’s just on the domestic system fares have come in lower than everyone in the industry had expected,” JetBlue Chief Executive Officer Robin Hayes said on a call this week.

Southwest shares tumbled the most in almost a year on July 27 after it warned that higher-than-expected costs would pressure earnings. The Dallas-based carrier this week offered a buy one, get one 50% off fare deal for the first time. The three-day sale was for travel in August and September.

Spirit Airlines Inc., the largest deep discount carrier, reports second-quarter results Thursday.

The differences between their fortunes and that of global carriers is stark. United Airlines Holdings Inc. and Delta Air Lines Inc. each said they would earn more this quarter than analysts expected. The companies, along with American Airlines Group Inc., all improved their full-year forecasts.

Investors appear to be rewarding the global carriers as well, with United shares increasing 40% this year through Wednesday, Delta 36% and American 25%. Alaska and JetBlue are up more modestly, while Southwest has slipped slightly and Frontier has dropped 18%.

Temporary Dip

Hayes and others have tried to soothe investor worries by suggesting the dip in demand could be temporary. Though they’ve stopped short of promising sales will improve after summer vacation season ends.

“We actually believe a lot of the demand is going to spill into the fall, and therefore, we have not made an assumption that this environment changes before we get into the heart of winter,” Frontier Chief Executive Officer Barry Biffle said Tuesday. “Although I do know that once we get to January, February, it’s a heck of a lot better to be in Florida than it is in most parts of Europe.”

And Wall Street isn’t betting on a rebound. Helane Becker, a TD Cowen analyst, said she was skeptical that domestic demand at JetBlue would recover sufficiently by year-end, and reduced her full-year adjusted earnings outlook for the carrier.

Views by the airlines that demand will swing back “may ultimately prove correct,” Conor Cunningham, a Melius Research analyst, said in a report. “But near-term, as industry capacity is set to ramp and fare sales become increasingly more common, fear on fares will only intensify.”