United lands while Delta leaves San Francisco in June 2023. (Photo by Tayfun CoSkun/)
According to a leading rating agency, the airline industry is facing problems in the coming year, partly because airfares are allegedly too low. However, Delta and United are likely to be the ones to overcome these problems most easily.
“The North American airline sector’s slower-than-expected revenue growth this year will likely weigh on cash flow generation and credit protection,” said Jarrett Bilous, managing director for airlines at S&P Global Ratings, in a new report. “Continued pressure on airfares could have a significant impact on credit profiles across the sector.”
“Our biggest concern right now is the risk of lower fares given the current domestic overcapacity in the U.S.,” Bilous said.
Still, he wrote: “We are not sounding the alarm on all issuer ratings. Delta, United and Air Canada stand out as profitability leaders through June 30, 2024. These airlines are heavily involved in higher-margin rewards and loyalty program revenue, the growth of which has outpaced that of economy seats and other revenue segments.
“These issuers should also benefit from what appears to be a steady recovery in business travel, which has lagged behind overall passenger traffic growth since the low point of the pandemic,” he said. “We therefore expect Delta and United to have the most room to cushion a scenario of weaker than expected market conditions through next year.”
As for airfares, industry trade group Airlines For America said Tuesday: “Due to intense competition among airlines, airfares in the United States are at historically low levels.”
“This year, fares are on average 6% lower than 2023 levels and, adjusted for inflation, are down 9% from last year,” A4A said.
“Compared to the same month in 2023, prices of household items have increased – eggs have shot up 19.1%, milk has risen 1.2% and essential living expenses like electricity have risen 5%, while rent has increased 5.1%,” A4A said. “In stark contrast, airfares have actually fallen 2.8%.”
The trade group said airfares were in a unique position: “They remained low despite significant price increases in other essential goods and services.” Since the industry was deregulated in 1978, domestic prices have fallen by almost 50 percent in inflation-adjusted terms.
Unfortunately, lower revenues mean that S&P has negative credit outlooks on a third of airlines, “with the bias toward historically low-cost airlines that rely primarily on main cabin seating and leisure travel,” Bilous said.
The low-cost carriers have suffered for three reasons: They no longer benefit from labor cost advantages, passengers are increasingly looking for premium seats and loyalty program benefits elsewhere, and their operations are disproportionately threatened by aircraft delivery delays and reliability problems with Pratt & Whitney engines.
In 2024, S&P Global Ratings lowered its ratings for Spirit and JetBlue and revised its outlook for Southwest and Allegiant to negative from stable. The agency
Regarding Southwest, Bilous said the airline’s low debt levels enabled it to earn the highest valuation for a North American airline, but profitability had lagged and “continued pressure on margins and earnings was a key potential headwind.”
Delta is “the primary beneficiary of the trend toward higher-margin rewards and loyalty programs, delivering superior margins relative to competitors,” while United has “delivered favorable margins year-to-date, supported by a strong international presence (which is more profitable than its domestic business) and an increasing rewards and loyalty presence,” he said.
As for American, Bilous wrote that the airline faces increased earnings pressure this year because it is “exposed to severe domestic overcapacity and weaker market conditions in Latin America, to a greater extent than its U.S. network peers.” American has also been hurt because it is “moving away from the distribution channel traditionally used by travel agents and corporate-managed travel programs,” he said. “We expect credit metrics to be weak for the rating in 2024, but expect an improvement next year.”
