Alaska Airlines Spooks Investors
Airlines probably shouldn't report sagging demand at the same time they increase capacity guidance — that's Investor Relations 101. But don’t fret: people still want to fly and business is fine.
Dear readers,
Yesterday, I wrote about how Ryanair is observing slight softness in Europe’s short-haul markets. Now we’ve got a U.S. airline sensing it too. Alaska Airlines executives described a similar phenomenon in North America, though they were deliberate about not calling it “softness” when an analyst asked if this might be the start of further declines. Instead, they said they view the current climate as cooling from the post-Covid peak.
“I don't know if I would use the term ‘softness’," chief commercial officer Andrew Harrison said Tuesday on the second quarter earnings call. "I do think it's finding that fine balance between supply and demand."
No matter the rhetoric, we probably can agree that the U.S. domestic market is not what it was a few months ago, which was probably predictable given the strong demand trends over the past year and a half. Revenge travel was real, but people couldn’t go on like that forever.
In some sense, Alaska is still riding the wave. It had a strong second quarter: $240 million, on revenues of $2.84 billion. Yet, as usual, analysts were concerned about the future. They were jittery about how Alaska planned to tackle the problem of weakening demand. Some were especially irritated that Alaska wants to fly more capacity than planned later this year, a development that should reduce domestic fares, not just for Alaska but also for the broader industry.1
Specifically, Alaska revised its full-year capacity outlook: it now says it will be up 11-13 percent (earlier it had said it would be up 8-10 percent, year-over-year). In a polite but pointed question, one analyst asked if the airline was embarking on a new strategy in which it would trade yield for capacity. Later, Helane Becker of TD Cowen summarized the call’s key theme when she remarked: "It seems that the pushback is too much capacity growth in a domestic market that's not really growing as rapidly, with pressure on fares."
Why did Alaska revise its capacity outlook?
You know the old quote attributed to Ronald Reagan: “If you’re explaining, you’re losing.” The poor executives at Alaska spent a lot of time explaining on Tuesday. I'm not sure the analysts were assuaged, but executives strained to show the numbers aren't how they appear.
"None of it is new flying," Harrison said.
So, what is it?