U.S. airline profits are set to come under pressure in 2023 as they look to shell out more cash to retain pilots amid worries about the impact of a potential recession on travel demand.
Major carriers such as United Airlines Holdings Inc., American Airlines Group Inc., Delta Air Lines Inc., and Southwest Airlines Co. have rushed to add staff after a faster-than-expected rebound in the U.S. travel market.
Some airlines have had to hand out bumper contracts to pilots, stoking concerns about a rise in costs as they recover from the pandemic when they were saddled with heavy debt loads.
“Margins are set to take a hit in 2023 as airlines ratify new contracts with labor groups,” Cowen analyst Helane Becker said last month.
“We expect pilot pay, which represents approximately 40 percent of labor expense, will increase by 20 percent to 30 percent under the new agreements.”
In a recent note, BofA Global Research estimated that the industry will need to hire about 5,200 pilots per year from 2024–2030.
The Context
Last month, Delta offered a 34 percent pay hike to pilots, which aviators at rival carriers termed as a new “benchmark”.
“Delta’s recent tentative pilot agreement, assuming it is ratified, could drive incremental unit costs higher by ~2 percent, and 2 percent to 3 percent higher for American, Southwest, and United,” Barclays analyst Brandon Oglenski said on Wednesday.
While costs take center stage, robust travel demand, fueled by a pent up desire to venture out and household savings accumulated during the pandemic, could provide some relief.
Investors will be looking for commentary from executives on whether demand is holding up, beginning with Delta, which reports results on Friday.
American Airlines on Thursday forecast a higher fourth-quarter profit as the Texas-based carrier benefited from strong demand for travel during the key holiday season.
Shares of American Airlines, Delta Air Lines, United Airlines, and Southwest Airlines fell between 14 percent and 30 percent in 2022 on mass cancellations and economic worries.
Fundamentals
* Analysts estimate United Airlines’ Q4 revenue will rise by 49 percent when it reports results on Jan. 17; earnings per share is estimated at $2.15
* Analysts estimate American Airlines’ Q4 revenue will rise by about 35 percent when it reports in next couple of weeks; earnings per share is estimated at $0.60
* Analysts estimate Delta Air Lines’ Q4 revenue will rise by about 29 percent when it reports on Jan. 13; earnings per share is estimated at $1.26
* Analysts estimate Southwest Airlines’ Q4 revenue will rise by about 24 percent when it reports on Jan. 26; earnings per share is estimated at $0.33
Wall Street Sentiment
* For American Airlines two of 20 brokerages rate the stock “buy” or higher, 15 “hold,” and three “sell” or lower; their median price target is $15, according to Refinitiv data
* For United Airlines, 12 of 21 analysts rate the stock “buy,” six “hold,” and three “sell”; their median price target is $51
* For Southwest Airlines, 15 of 21 analysts rate the stock “buy,” six “hold”; their median price target is $44
* For Delta Air Lines, 18 of 20 analysts rate the stock “buy,” two “hold”; their median price target is $46
By Aishwarya Nair and Kannaki Deka
