U.S. Airlines Expected to Follow Southwest in Lowering Sales Projections

Large U.S. airlines are likely to join Southwest Airlines Co. in reducing revenue projections this quarter because a recent surge in Covid-19 cases has cut into domestic demand and prompted trip cancellations, analysts said.

Close-in bookings have slowed and cancellations have climbed this month, driven by the rise in cases associated with a surging coronavirus variant, Southwest said in a statement Wednesday. After making a profit in July, it may be “difficult” to replicate the performance over the three months through September, the Dallas-based carrier said.

Southwest’s warning comes as the delta variant threatens a global travel recovery, adding worries about a decline in leisure travel just as summer demand peaks this month. A growing number of companies, including Amazon.com Inc. and Wells Fargo & Co., are delaying full reopenings of corporate offices. This has prompted forecasts that a vital business travel recovery will be pushed out further.

“We expect all the airlines to follow a similar pattern taken by Southwest and Frontier as they look to update guidance in the coming weeks,” Conor Cunningham, an analyst with MKM Partners, said in a report Wednesday. He expects the effect on demand to be temporary, similar to other coronavirus-case waves.

What Bloomberg Intelligence Says

“A guidance change within just three weeks shows demand for domestic leisure travel, the pillar of U.S. airline profit and cash generation, is falling fast on a Covid-19 resurgence and the approach of summer’s end.”
-- George Ferguson, BI senior aerospace industry analyst

Click here to read the research.

Last week, budget airline Frontier Airlines Holdings Inc. raised fresh concerns when it attributed softness in its bookings to the delta variant. Analysts Helane Becker at Cowen and Savanthi Syth at Raymond James also expect other carriers to make similar announcements in early September.

Southwest rose 1.5% at 3:18 p.m. in New York amid advances in broader U.S. stock markets. United Airlines Holdings Inc., American Airlines Group Inc. and Delta Air Lines Inc. all increased more than 1%.

Delta Air and United each said last month that they would halt losses in the third quarter and be profitable for the rest of the year, despite the rising variant cases and excluding any help from billions of dollars in government aid, while American Airlines said its losses would narrow this quarter. All three carriers said Wednesday they had no new information to share at this time.

“The most significant risk into the fall comes from the delta variant continuing to restrict access to offices, further pushing to the right a meaningful return of corporate travel,” Sheila Kahyaoglu, a Jefferies analyst, said in a note.

Global gross domestic product in the third quarter is on track for a 1.8% expansion from the previous three months, according to a “nowcast” from Bloomberg Economics. That’s an improvement from the solid pace in the previous quarter, and may quell fears that the delta variant will slow the economic recovery from last year’s recession.

With long-haul travel virtually off limits due to government-imposed restrictions, recovery has focused so far on the domestic market, and some U.S. carriers have struggled with cancellations and delays linked to weather disruptions and tight staffing. U.S. ticket demand worsened last week, with the sales generated at travel agencies 51.4% lower than in 2019 -- a drop of more than 5 percentage points compared to mid-July, according to data from Airlines Reporting Corp.

Southwest sees third-quarter operating revenue down 15% to 20% compared with 2019, with August sales down by the same amount. The airline previously forecast a 12% to 17% decline for that month. Southwest’s outlook assumes coronavirus cases continue to rise and that the slowing revenue trends this month persist into September.

©2021 Bloomberg L.P.

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