Europe’s revenge travel boom runs out of steam, hurting airline profit goals

Just as the annual summer vacation gets underway in Europe, airlines in the region are feeling a cold chill wafting over the Atlantic from their U.S. counterparts.

On Wednesday, United Airlines became the latest carrier cautioning weakening profitability, joining the likes of Alaska Airlines Group Inc. and Delta Air Lines in offering a muted outlook. Airlines have warned of falling ticket prices amid a fare war that’s weighing on their profit, hurting carriers during a time of the year that normally marks an industry peak.

Some of that pessimism on display in the U.S. has already taken hold in Europe and beyond. Last week, Deutsche Lufthansa AG cut its profit outlook for the full year and warned that breaking even at its namesake German unit will be challenging. Qatar Airways has cautioned that higher capacity in the market is putting pressure on fares.

In June, Dallas-based Southwest Airlines lowered financial expectations for the second quarter due to “current booking patterns in this dynamic environment,” the company said. That and other recent financial challenges have prompted activist investors to take a stake and put pressure on Southwest, which until recently was a profits machine.

It’s a reversal from the post-pandemic rush, when ticket prices soared as people splurged on holidays after two years of home confinement, in what was dubbed “revenge travel.” Corporate travel, which typically balances out deal-seeking holidaymakers, also hasn’t rebounded properly post-pandemic, adding more uncertainty to the airlines’ outlooks.

As travel trends normalize, and after two years of rising cost of living, people are less willing to pay steep fares on holiday travel, and airlines in turn are being forced into discounts to fill extra seat capacity. Adding to the mix in Europe are air-traffic control issues and wage disputes at airlines like Aer Lingus that are creating disruption to schedules and putting people off flying.

“The vigorous post-COVID recovery in global demand is now running out of steam,” Oddo BHF analysts Olfa Taamallah and Yan Derocles wrote on Thursday in a note. They cut their ratings on Ryanair Holdings Plc, EasyJet Plc and Lufthansa, saying that more uncertain demand with moderate fare increases and delivery delay issues were behind their adjustments.

Excess capacity is emerging as a key pain point for airlines as they bring back services that were put on pause because of the pandemic. Lufthansa is growing capacity too quickly, Stifel Nicolaus & Co. analyst Johannes Braun said this week following the German company’s warning, predicting that the airline faces long-running “profound” problems ahead.

“It’s price that’s the weakness,” Sheila Kahyaoglu, an aviation analyst at Jefferies said on Bloomberg Television. “Airlines are blaming it on overcapacity, and not on consumer weakness. I think it’s a case of the latter rather than the former.”

The subdued mood is visible in airlines’ share-price performance. Lufthansa has lost about 27% this year, putting it on track for the worst annual return since 2020. Air France-KLM has fared even worse, dropping 38% so far in 2024 as the airline group’s French subsidiaries face additional disruption from people avoiding Paris during the Summer Olympic Games.

The notable outlier is IAG SA, owner of British Airways, Iberia and Aer Lingus, whose stock has gained 12% this year. The more optimistic view stems from expectations that the company’s transatlantic segment will continue to perform well, according to Oddo BHF analysts.

The health of the industry will be put to the test next week when aviation executives meet at the Farnborough Air Show near London. The venue is typically the site of large deal making, though this year’s expo stands to be slower as Boeing Co. and Airbus SE contend with production issues and in return put less focus on new sales.

Airbus cautioned just a few weeks ago that it would have to revise its delivery and production plans, adding more evidence to the subdued mood in the industry.

Discount specialists Ryanair and EasyJet also report earnings next week, providing key insights into travel demand at the budget spectrum of the market. Ryanair has laid on several rounds of discounts to stimulate demand, and Chief Executive Officer Michael O’Leary has cautioned that summer fares will be lower than previously estimated.

Still, given the rapid drop in airline shares this year, some analysts say the worst for the sector may be over.

“At this stage, I think a lot of the bad news is priced into the sector,” said Dudley Shanley, head of research at Goodbody. “While the fare environment in Q2 was weaker, I am expecting peak summer fares to be higher.”

– Kate Duffy and Siddharth Philip for Bloomberg

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