What Do Airlines' Second Quarter Results Mean for Airfares?
Photo courtesy of MLT Vacations )
Major US airlines will be announcing their second quarter financial results this week. The first half of the year has not been very straightforward for these carriers, but it appears that it will be easy for them to put a positive spin on their performance for the months of April, May and June.
Revenue and fuel prices are still concerning
Airlines were hit especially hard on Wall Street during the second quarter. As they have expanded to meet growing demand, major carriers are struggling with per-seat revenue figures, which basically show that they are not operating efficiently and they are not able to control pricing.
Fuel prices have also started moving upwards again. This has caused worry since cheap oil has been one of the main reasons that carriers have been enjoying record profits over the past year and a half.
Airlines, for their part, have not shied away from this fact.
Both Delta and American have told shareholders that fuel prices are on the rise and that this will increase operations budgets going forward. American said that it expects its fuel cost to rise by as much as 33 percent during the 2016 calendar year.
Profits are still impressive
The rising fuel costs and poor revenue figures make it seem like the second quarter was dismal. That is not entirely true, however. Delta has already announced that its Q2 profits topped $1.5 billion. This is an especially impressive figure not only because it topped the billion mark, but also because it beat analysts' expectations.
American Airlines is expected to announce profits of over $900 million during its earnings call with investors on Friday. This is not as impressive as its record breaking second quarter of 2015, when AA earned $1.7 billion. However, given that the airline’s stock was down by as much as 37 percent during the quarter, $900 million is still a very good number.
Airlines have started to turn things around
Though its shares were down by more than one third during Q2, American rebounded on Wall Street thanks to promises to improve its revenue performance. Shares are now only down 11 percent compared to their Q2 high point.
Why the turnaround? Like the other legacy carriers, American has made cuts to its growth plans, and investors seem to be responding positively to this, realizing that it will eventually bring up revenue numbers because there will be fewer additional seats to fill.
But that means prices will rise
Investors are happy, but, by slowing down growth, airlines will balance out the supply-and-demand equation. This will eventually lead to higher airfares. Though fares will probably inch upwards instead of spiking, it seems clear that the price of flying has already bottomed out.
Low cost carriers still healthy
One piece of good news for fliers is that low cost carriers are performing better, in terms of revenue, than major airlines. Southwest actually expects to have a positive unit revenue figures for the year. Because they are healthier, low cost carriers won’t be under the same pressure to raise fares. Hopefully, they will keep trying to compete on price and this will keep legacy carriers from increasing fares too much (at least on competitive routes).
Second quarter earnings announcements will show that airlines are improving in terms of unit revenue and overall financial strategy, but they still have a long way to go. Meanwhile, fliers should expect to see fares creep up.
If fliers see airlines announcing improved revenue numbers at the end of the third quarter, it will be confirmation that fares will be increasing further.
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