By Rajesh Kumar Singh
CHICAGO (Reuters) -U.S. carriers are struggling to offset higher costs even as booming travel demand has given them strong pricing power, raising questions about their ability to shield profit once consumer demand softens.
Those worries are battering airline shares, taking the focus away from what is shaping up to be the industry's strongest earnings season in three years.
Shares of American Airlines (NASDAQ:AAL) Group Inc and United Airlines fell more than 9% on Thursday even after both carriers posted their first quarterly profit without U.S. government aid since the COVID-19 pandemic began.
Airlines expect travel demand to hold up even in the second half of the year as there is little evidence of higher fares, persistently high inflation and rising interest rates curbing consumer spending.
But staffing gaps and aircraft shortages have made it tougher to ramp up capacity and fully tap booming demand. In fact, carriers have been forced to cut flights and make costly staffing adjustments to avoid cancellations and delays, driving up operating costs.
American, United and Delta Air Lines (NYSE:DAL) see no let up in cost pressure this year as capacity constraints are not allowing them to operate as many flights as they did before the pandemic.
Delta doesn't plan to add more flights for the rest of the year. Similarly, United intends to keep its capacity below the pre-pandemic level in the current and fourth quarters.
To ensure adequate staffing, they are being forced to spend more. Delta, for example, expects to spend over $700 million this year in overtime and premium pay, 50% higher than in 2019.
Carriers are also hamstrung by construction projects at airports and staffing gaps among air-traffic controllers. United said it will cut 200 flights a day in Newark in September as a result of runway construction.
United Chief Executive Scott Kirby (NYSE:KEX) said the company will prioritize operational reliability by overstaffing until the entire aviation infrastructure returns to normal.
"It means that there will be cost pressures," Kirby told investors on an earnings call.
Labor unions and some analysts blame the industry's decision to let go thousands of workers at the height of the coronavirus pandemic in 2020 for its staffing challenges. Carriers have been aggressively hiring, but training backlogs have left them still short-staffed.
Meanwhile, a rush to staff up is driving up labor costs.
American has offered its pilots a base pay increase of about 17% after United agreed to a double-digit pay hike for its pilots. To attract and retain talent, the Texas-based carrier has also announced hefty pay increases for pilots at its regional carriers.
"As an industry, pilot wages are going to increase," said American Chief Executive Robert Isom. "And that's something that the industry as a whole is going to have to digest."
Airlines are also facing higher fuel costs, but a decline in global prices is expected to offer some relief. Yet, United warned that higher fuel prices would be the new normal for the industry. It expects its fuel bill this year to be $9 billion higher than in 2019.
Strong consumer demand, thus far, has allowed carriers to mitigate inflationary pressure with higher fares. Analysts, however, are not sure they will have the same pricing power in the fall when leisure travel bookings tend to slow down.
Christopher Raite, senior analyst at Third Bridge, said business travel spending will have to pick up the slack.
But the industry's struggle to get operations back on a smoother track as well as a worsening economy have cast a shadow on business travel demand. Many companies have already started tightening their purse strings.
"The airline industry is fundamentally less profitable than it was pre-pandemic," Raite said. "If we are to see corporations cut back, that would be a bad sign for airlines."