S&P's Report

Airlines in crisis: operating costs and falling ticket prices the risks for the industry

Rating agency S&P cuts the outlook of US low-cost airlines, which are running for cover by introducing the premier economy

23 August 2024

2' min read

The post-pandemic recovery is now behind us, transport is returning to normal and European and American airlines are facing numerous challenges that are undermining future growth: from rising operating costs, geopolitical crises, delays in aircraft deliveries by Airbus and Boeing to falling ticket prices, all of which are putting pressure on the sector even on the stock market with sector indices negative since the beginning of the year: -21% in the US, -6% in Europe.

This was highlighted in Standard & Poor's latest report 'North American Airlines Face Turbulence in 2024, Hope for Smoother Skies in 2025', which analysed the second-quarter financial data of US airlines and showed slower-than-expected revenue growth in 2024 for US carriers, mainly attributed to falling ticket prices with a negative impact on airline ratings.

The report lists the many causes that may cause tension on the financial front in the coming months from rising wages to higher maintenance costs, from overcapacity to competitive pressures that are affecting profitability to rising fuel costs.

In light of this analysis, the rating agency has moderately revised downwards its forecast for the air transport sector for the current year with a positive outlook, but at lower levels than previously expected. For 2025, despite the challenges, the outlook remains positive with solid financial results.

Some airlines are suffering more than others, such as low-cost Southwest Airlines, whose outlook has been revised from stable to negative, while JetBlue and Spirit Airlines have had their ratings downgraded due to overcapacity in the market pushing prices down. In contrast, Delta Air Lines, United, American Airlines and Air Canada continue to report solid results, confirming their positive outlook.

To protect themselves against falling fares, airlines are adding seats to premier economy class, the intermediate travel class between economy and business class, a choice that is also beginning to be adopted by low-cost airlines such as Southwest, the world's first low-cost airline, which first announced it wanted to enter the premium market, to JetBlue, which will introduce first class on domestic flights.

After all, it is precisely the low-cost carriers that are suffering this phase, as another Morningstar rating company Dbrs points out, due to the greater pressure they are under compared to full-service carriers. High operating costs and weakening pricing power are affecting profitability, while some markets present structural challenges. Challenges are likely to continue in the short term with a gradual recovery expected in 2025. Smaller LCCs may see their credit profile deteriorate more significantly, the report concludes.