United Airlines Holdings (NASDAQ:UAL) forecasted lower-than-expected profit for the current quarter, reflecting the challenges posed by excess seat capacity in the domestic market, which has undermined pricing power across the airline industry. The Chicago-based carrier expects an adjusted profit in the range of $2.75 to $3.25 per share for the quarter ending in September, below analysts’ expectations of $3.44 per share, according to LSEG data. This announcement resulted in United’s shares dropping about 1% in after-hours trading.
Industry Capacity and Pricing Pressure
United Airlines indicated that the industry might witness a shift in capacity by mid-August, with U.S. carriers estimated to reduce their seat offerings by 300 basis points from a year ago. To enhance pricing power, United plans to reduce its domestic capacity in the fourth quarter by a similar margin. CEO Scott Kirby remarked, “Looking forward, we see multiple airlines have begun to cancel loss-making capacity. We expect leading unit revenue performance among our largest peers in the second half of the third quarter.”
Comparisons with Delta and Market Conditions
United’s outlook echoes similar sentiments from Delta Air Lines (NYSE:DAL), which recently forecasted a significant improvement in its pricing power from August onwards but also projected a lower-than-expected profit for the third quarter. Despite a booming summer travel season, with over 3 million passengers passing through U.S. airport security checkpoints on July 7, according to the Transportation Security Administration, the rush to capitalize on this demand has led to overcapacity and reduced pricing power.
Impact on Ticket Prices and Revenue Forecasts
Data from consultancy Cirium shows that major airlines have scheduled about 6% more seats in the domestic market this month compared to last year. This overcapacity has driven down ticket prices, with the average round-trip ticket price for a U.S. domestic flight at $543 in May, down 1% month-on-month and 3% from a year earlier, according to the Airlines Reporting Corporation. This trend has forced other major carriers like American Airlines (NASDAQ:AAL) and Southwest Airlines (NYSE:LUV) to cut their revenue forecasts for the second quarter, citing the need to offer price discounts.
Future Projections and Profit Estimates
Analysts and industry officials suggest that a moderation in industry capacity in the latter half of the year should help stabilize ticket prices. Airlines have been relying on higher airfares to offset rising operating costs. Despite the current challenges, United Airlines reaffirmed its 2024 profit estimate of $9-$11 per share. The company reported adjusted earnings of $4.14 per share for the June quarter, surpassing analysts’ expectations of $3.93.
Strategic Adjustments and Investor Communication
As the industry adjusts to these dynamics, United Airlines’ strategy includes capacity reduction to strengthen its pricing power. The company will further discuss its quarterly results in an upcoming call with analysts and investors on Thursday morning. This communication is crucial for providing insights into United’s approach to navigating the current market conditions and its long-term outlook.
Conclusion
United Airlines’ profit outlook for the third quarter highlights the ongoing challenges in the airline industry, particularly due to overcapacity and pricing pressures. While the company is taking strategic steps to mitigate these issues, the impact on its financial performance is evident. As United Airlines and its competitors continue to adapt, the focus will be on how effectively they can balance capacity, pricing, and profitability in a highly competitive market. The forthcoming investor call will provide further clarity on United’s strategies and expectations moving forward.
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