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The 2024 summer saw record numbers of travelers flock to U.S. airports.
“Air travel volumes this summer are the highest the agency has seen in its [22-year] history,” the U.S. Transportation Security Administration (TSA) stated, reporting an average of 2.7 million passengers screened daily.
But a series of factors, including the unexpected CrowdStrike outages in July, saw the U.S. industry arrive this summer at what appears to be a sobering end to the post-pandemic honeymoon of returning passengers and profits.
American Airlines and Southwest Airlines reported a 46% year-over-year decline in second-quarter net earnings. Delta Air Lines suffered a major operational meltdown in July related to the CrowdStrike glitch that is expected to cost the company around $500 million, to say nothing of reputational damage. Even before the wave of flight cancellations, Delta reported a 29% year-over-year drop in second-quarter net income.
Delta CEO Ed Bastian called the operational problems related to CrowdStrike “a wake-up call.” He could have been referring to the U.S. majors’ earnings results more generally. All four U.S. majors—American, Delta, Southwest and United Airlines—saw revenue rise modestly year-over-year in the second quarter, but below expectations and not enough to keep up with escalating costs, especially labor costs. Only United was able to turn more revenue into increased profits, with the Star Alliance carrier’s second-quarter net income improving 23.1% year-over-year.
U.S. domestic network maps are changing, with major airlines moving regional aircraft out of smaller markets and new entrants like Avelo Airlines and Breeze Airways taking advantage of population shifts that are driving demand in smaller markets for more nonstop connections, especially to leisure destinations. The majors appear unsure of when and where to compete on these upstart routes.
Further complicating matters is that traditional business traffic has not fully recovered following the pandemic, changing the pricing equation on many domestic routes.
U.S. airlines are feeling pressure “due in large part to their unprofitable flying in many domestic markets” during the first half of 2024, United CEO Scott Kirby said during United’s second-quarter earnings call. “It was always inevitable that carriers would begin to cancel this unprofitable flying.”
United CCO Andrew Nocella added that “looking back at the [second] quarter now, it is increasingly clear that demand was, in fact, strong. It just could not keep up with the incremental industry domestic capacity added in 2024. Excess capacity, in turn, pressured yields.”
It’s not just the shape of the domestic route map that is changing. Cabins are also seeing layout adjustments. Southwest, to much fanfare, announced it is giving up on open seating, which had long been a key selling point, in search of more revenue with assigned seats. CEO Bob Jordan told analysts that the airline’s earnings results were “not where we need them to be” and promised “fundamental changes.”
U.S. airline executives agreed they offered too many seats in the first half of the year. According to Kirby, U.S. carriers got “over their skis on capacity” and then rushed “to get the load factors up, and they lower prices and that lowers overall revenue.”
American CEO Robert Isom concurred. “In the second quarter, we saw the impact of too much industry supply in the domestic market, especially in regions of the country where we have larger operations,” he told analysts. “That excess capacity led to a higher level of discounting activity in the quarter than we had anticipated.”
COSTLY CONTRACTS
According to Airlines for America (A4A) data, labor accounted for 33% of U.S. airlines’ costs in Q1 2024, up 7.9% year-over-year, making it by far the highest cost category. Fuel, the next highest category, constituted 19% of costs in the first quarter, down 12.5% year over year.
Southwest’s second-quarter CASM was 15.04 cents, up 2.6% year-over-year—lower than American’s Q2 CASM of 17.21 cents, but much higher than ULCC Frontier’s 8.98 cents.
The days of Southwest operating as the low-cost upstart are over. As Southwest and the rest of the U.S. industry continues to learn, nothing is guaranteed and the only constant in the airline business is change.
Hear ATW editors discuss the financial state of U.S. airlines on our Window Seat podcast: bit.ly/3AT9gRw
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