It should have been a great year to be an airline. Instead, on both sides of the Atlantic, plunging fares, terrorism fears and currency swings are buffeting big legacy carriers and budget airlines alike.
Shares of Southwest Airlines Co. , the largest hauler of domestic U.S. passengers, sank 11% Thursday after the company said it expects unit revenue—a closely followed measure of sales per seat flown each mile—to decline by as much as 4% in the third quarter.
The Dallas-based airline’s average one-way fare for the second quarter fell 3.7% from a year earlier to $151.67.
As lower oil prices led to lower fuel bills, many airlines took advantage by adding flights and seats—but they overestimated demand.
Now, U.S. airlines are caught in a spiraling fare war, led by super-discount carriers like Spirit Airlines Inc. and Frontier Airlines Inc. Corporate fares, often some of the most profitable tickets an airline can sell, are also falling.
Unit revenue for the U.S. industry overall has been shrinking for more than a year, and the outlook is only worsening. Seattle-based Alaska Air Group Inc. said its second-quarter passenger unit revenue fell 7.7% from a year earlier. It boosted its capacity by nearly 10% in the period.
American Airlines Group Inc., the top U.S. carrier by traffic, is set to report its second-quarter results on Friday. The Fort Worth, Texas-based carrier has said it expects to report unit revenue down between 6% and 7% from a year earlier.
Delta Air Lines Inc., the No. 2 U.S. carrier, estimates that third-quarter unit revenue will decline between 4% and 6% year-over-year, and sees weaker domestic pricing trends on corporate tickets. No. 3 U.S. carrier United Continental Holdings Inc. expects third-quarter unit revenue to slip between 5.5% to 7.5%.
“Capacity is growing faster than demand across the industry, and that’s putting pressure on yields in an environment where corporate demand is not keeping up with that pace of capacity,” Jim Compton, United’s chief revenue officer, said on an earnings call Wednesday.
Across the pond, terrorism, air-traffic-control strikes and the uncertainty surrounding Britain’s vote to leave the European Union have delivered shocks that have hit demand all year. Airlines have been forced to slash ticket prices to fill planes.
Earnings expectations are being scaled back. Late Wednesday, Deutsche Lufthansa AG , Germany’s largest airline, warned profit for the year would fall because of reduced bookings. It blamed this year’s terror attacks across the region, as well as political and economic uncertainty.
Bookings, particularly for long-haul flights, “have declined significantly,” the carrier said. Lufthansa does lots of business servicing Asia, where consumers are typically among the fastest to cancel travel plans in the face of overseas unrest. Lufthansa shares fell almost 6% Thursday.
The terrorist attack in Nice, France, a week ago—in which a truck driver plowed into revelers, killing at least 84 people—and last weekend’s failed coup in Turkey are the latest events to weigh on bookings. Turkey declared a state of emergency late Wednesday.
Carolyn McCall, chief executive of U.K.-based budget airline easyJet PLC, said Thursday that the environment for airlines hasn’t been this bad in a decade.
“You have more terrorist events this year than in any year that anyone can remember,” she said. The attacks have dented consumer confidence, as have air-traffic-control strikes that have canceled thousands of flights across Europe. The British pound’s sharp fall after the so-called Brexit vote last month has also hurt, the easyJet boss said.
Shares in easyJet and British Airways parent International Consolidated Airlines Group SA have both fallen more than 20% since the June 23 referendum. Investors worry demand will drop amid the economic uncertainty in one of Europe’s biggest markets. Regulatory uncertainty has also hit airlines after the vote. Within hours of the vote results, IAG cut its projection for full-year profit growth.
Brexit also threatens the big U.S. carriers’ trans-Atlantic business, another often highly profitable segment. Delta last week said foreign-currency pressure from the steep drop in the British pound and the economic uncertainty from Brexit prompted it to cut deeply into its capacity plans out of the U.K. this winter.
Delta, which owns 49% of Virgin Atlantic Airways Ltd., said Virgin Atlantic is taking similar steps. Overall, the pair’s U.K. capacity this winter will be down between 2% and 4% compared with a year earlier.
Source: WSJ