U.S. airlines are slowing low-cost capacity growth to protect their pricing power in the face of weakening domestic travel demand.
At the same time, rising labor and fuel costs, along with problems with aircraft engines, are driving up their costs and eating into their profits, they said Thursday.
Southwest Airlines, the nation’s largest airline, now expects year-over-year capacity growth in the January-March quarter to be between 10% and 12%, down from a previous estimate of 14% to 16%.
It also reduced capacity growth plans for 2024 to better align with current demand trends.
The Dallas-based company said that while global travel demand remains strong, it experienced lower-than-expected bookings in August and September.
For its part, low-cost airline Spirit Airlines said it was reviewing its growth profile due to reduced demand. “Unfortunately, we are not seeing the expected return to a normal demand and price environment for the holiday seasons,” he said.
The company, based in Florida, forecasts annual capacity growth of 7% in the March 2024 quarter, which is lower than the estimated growth of 14% in the current quarter.
Rival Frontier Airlines did not provide an estimate for the first quarter, but its capacity growth in the current quarter is expected to be up to 9 percentage points lower than a quarter ago.
Shares of Southwest and Spirit declined 2% and 4%, respectively. Frontier rose 4%.
Analysts have called on airlines to reduce capacity to protect their pricing power. In the third quarter, companies increased their capacity in the US domestic market by 10% compared to last year and expect a 9% increase in the current quarter.
Savi Syth, airline analyst at Raymond James, called the capacity adjustments “favorable for future price trends.”
The airline sector relies on strong demand to ease inflationary pressure with higher ticket prices.
Fares, however, have had double-digit declines for five consecutive months compared to last year. Ticket prices for the upcoming Thanksgiving weekend also fell, according to data from travel website Kayak.
Meanwhile, the shortage of crude oil and the increase in labor rates boosted fuel prices and wages. Southwest expects costs to increase next year.