Airlines remain bullish on travel demand despite mounting economic worries

[January 18, 2023]  By Rajesh Kumar Singh

CHICAGO (Reuters) - U.S. airlines posting strong financial results remain upbeat about travel demand, even as economists and analysts say the risk of an economic recession has gone up.

Carriers are enjoying the strongest travel demand since the start of the COVID-19 pandemic, boosted by reopening of closed borders, a strong U.S. dollar and rising corporate travel.

United Airlines Holdings on Tuesday forecast at least a four-fold jump in full-year profit for this year as it expects travel-hungry customers to fill planes.

Similarly, Delta Air Lines expects to nearly double its full-year earnings this year.

The upbeat reports come just as over half of the 50 U.S. states are exhibiting signs of slowing economic activity, breaching a key threshold that often signals a recession is in the offing, the St. Louis Federal Reserve Bank said in a report last month.

A worsening economic outlook and rising financial fragility of U.S. households have sparked concerns about consumer spending.
 

Booming demand has helped carriers mitigate higher fuel and labor costs through higher ticket prices, but any slowdown in consumer spending is expected to undermine their pricing power.

Airline executives are downplaying that risk, saying the urge to travel remains strong. If anything, they say, the relationship between passenger revenue and broader economy is returning to pre-pandemic trend.

United estimates domestic passenger revenue used to account for about 0.5% of the country's GDP. It expects the trend to be restored this year, resulting in 15% higher revenue for the industry this year.

According to Delta's calculations, consumers will spend $30 billion on travel in 2023.

United Airlines planes are parked at their gates at O'Hare International Airport ahead of the Thanksgiving holiday in Chicago, Illinois, U.S., November 20, 2021. REUTERS/Brendan McDermid

"We know...the public wants to travel in outsized amounts," Delta's Chief Executive Ed Bastian said last Friday.

United's Chief Executive Scott Kirby last month said the word recession wouldn't have been in his vocabulary, if he were not reading or watching news as the airline had not seen any signs of it in booking data.

The first quarter, after the holiday travel season, tends to be the weakest season for the industry.

But Delta last week said advanced bookings for each month of the current quarter is "significantly" ahead both in terms of passenger revenue and volume compared to 2019.

Demand for flights to Europe is also robust and is expected to generate record spring and summer revenues, it said.

Meanwhile, staffing and aircraft shortages across the industry are expected to persist and limit capacity growth, underpinning the pricing power carriers are currently enjoying.

United expects total revenue per available seat mile, a proxy for pricing power, to be up 25% from a year ago in the current quarter.

"Demand remains strong, pricing is likely to remain favorable due to industry capacity constraints," said Cowen analyst Helane Becker.

(Reporting by Rajesh Kumar Singh; Editing by Peter Henderson and Aurora Ellis)

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