Another warning of a U.S. economic recession: multiple airlines' stock prices plummet as earnings expectations are drastically cut
American Airlines stocks have recently suffered a heavy blow, with several airlines lowering their profit forecasts due to reduced spending caused by economic uncertainty. Delta Air Lines was the first to lower its expectations, with its stock price dropping 29% over the past month. United Airlines and American Airlines are also facing similar predicaments, with stock prices falling 28% and 8.32%, respectively. Southwest Airlines, on the other hand, saw its stock price rise by 7% due to the cancellation of its free checked baggage policy. Overall, airline stocks have dropped 23% in the S&P 500 index, indicating a pessimistic outlook for the industry
According to the Zhitong Finance APP, U.S. airline stocks have recently been "in turmoil." Following Delta Air Lines (DAL.US) being the first to issue a profit downgrade statement on Monday, more U.S. airlines joined in on Tuesday, all lowering their profit expectations, citing increasing economic uncertainty leading to reduced spending by businesses and consumers. These airlines also warned that recent economic pressures would prompt the industry to further cut capacity after the summer travel peak to avoid any pricing discount pressures.
Stock Prices Suffer "Bloodbath," Outlook Clouded
Concerns over travel spending have severely impacted airline stocks, with selling accelerating on Tuesday. Delta Air Lines' stock price has fallen 29% over the past month, and during midday trading on Tuesday, it dropped another 8%, closing down 7.25%. United Airlines (UAL.US) has seen its stock price decline 28% since February 10, falling another 5% on Tuesday, closing down 2.01%. American Airlines (AAL.US) also experienced a downward trend, closing down 8.32% on Tuesday.
Southwest Airlines (LUV.US) saw its stock price rise 7%, after the company canceled its signature free checked baggage policy to increase revenue. Under pressure from activist investor Elliott Management (currently one of its largest shareholders), the company scrapped the free baggage policy that had been in place for over fifty years. Additionally, the company announced last month that it would cut 15% of its workforce, approximately 1,750 jobs, marking the first involuntary layoffs in its history.
The airline sector index within the S&P 500 has dropped 23% over the past month, compared to a roughly 8% decline in the broader S&P 500 index.
Recent earnings reports from airlines also reveal bleak information, with multiple companies in the industry lowering their profit expectations, indicating a pessimistic outlook for the airline industry.
On Monday, Delta Air Lines cut its first-quarter profit forecast by half, citing a weakening demand for domestic travel in the U.S. On Tuesday, American Airlines projected a larger loss for the first quarter due to expected significant revenue slowdown. Southwest Airlines also lowered its first-quarter revenue expectations, citing reduced government travel and significant impacts from California wildfires.
United Airlines stated that its first-quarter profits are expected to be at the lower end of the previously forecast range due to a 50% drop in government-related ticket bookings. The airline noted that reduced government spending has also had a ripple effect on the domestic leisure travel market.
These profit downgrades stand in stark contrast to the situation a month ago when limited industry capacity and strong consumer demand enhanced airlines' pricing power, leading to a bright outlook after years of profitable growth.
Economic Concerns Threaten Airline Industry Confidence
U.S. consumer and business confidence has been weakened by President Donald Trump's tariffs, the threat of further tax increases, and growing concerns over rising prices. The closely watched GDPNow tracking model from the Atlanta Federal Reserve Bank indicates that the U.S. economy may contract in the first three months of this year.
Investors and analysts indicate that as travel spending is closely tied to overall economic activity, an economic downturn will pose challenges for the airline industry. Since Trump's return to the White House, government spending cuts have impacted airlines' revenue from government sources American Airlines CEO Robert Isom stated at the JP Morgan industry conference, "Economic uncertainty is a big issue."
Isom and Delta Air Lines CEO Ed Bastian also mentioned that recent accidents and weather events are factors suppressing travel demand.
Actively Self-Rescue
Airlines stated that bookings for high-end and long-haul international travel remain strong, adding that falling fuel prices will help alleviate the pressure of slowing demand. However, they are taking additional measures to protect profit margins.
Delta Air Lines indicated that it has adjusted its booking strategy. American Airlines has adjusted its capacity in the Washington area due to a decrease in government-related bookings, which was once one of its most profitable markets.
United Airlines stated that it has cut capacity in government and cross-border markets and plans to cancel overnight flights. The airline also expedited the retirement of 21 aircraft to save on maintenance costs.
The company's CEO Scott Kirby said at the JP Morgan conference, "The airline industry is moving towards a focus on its comparative advantages. As we are about to experience what seems to be a more challenging economic period, we will accelerate this process."
