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.

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.