US Airlines Investors Worry Over Travel Surge Softening Due To Increasing Expenses

Despite the ongoing travel boom, U.S. airlines are facing a challenging time. Investors are worried that a weakening economy may lead to a drop in demand, making it difficult for airlines to maintain profits amidst escalating costs. This concern is impacting airline stocks, even though earnings reports indicate a sustained interest in travel. United Airlines' shares dropped around 10% on Wednesday after the company predicted a lower-than-anticipated profit for the fourth quarter due to increasing expenses. 


Due to difficulties in controlling operating costs, analysts are questioning Delta Air Lines' aim of achieving over $7 per share profit next year. Despite posting better-than-expected quarterly earnings, Delta's shares have fallen 10% this month. Airlines have been able to offset inflationary pressure with higher fares due to strong demand from travelers. However, a significant drop in airfares year-over-year indicates that airlines' ability to set prices may have peaked. This raises concerns about how airlines will hedge against rising costs.

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Airlines could face more severe impacts than before if demand decreases, as their operational costs have significantly increased. While acknowledging these higher costs, airlines maintain that passenger revenue indicates a robust demand trend. Rising fuel prices and new labor contracts mean cost pressures are here to stay. For instance, Delta's costs are expected to increase by $400 million in the second half of the year due to rising fuel prices, leading the airline to lower its profit outlook for 2023.


United also anticipates an 11% increase in its average fuel bill in December compared to the previous quarter. The company is also dealing with challenges from the Israel-Hamas conflict. Delayed deliveries of aircraft and jet engines have compelled airlines to operate older, less fuel-efficient planes and spend more on maintenance. American Airlines and Alaska Air have reduced their third-quarter profit estimates due to higher fuel costs. The inability of airlines to meet their cost targets has been difficult for analysts to accept.

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