United Airlines reported a robust 23% increase in second-quarter profit, driven by strong demand for international travel. However, the airline's third-quarter forecast fell short of Wall Street expectations due to industry-wide overcapacity, which has pressured airfares.
United announced it expects to earn between $2.75 and $3.25 per share on an adjusted basis for the current quarter, below the $3.44 per share projected by analysts polled by LSEG. The company's revenue for the second quarter came in at $14.99 billion, slightly below the anticipated $15.06 billion.
United's CEO Scott Kirby addressed the challenges during a call with analysts, noting the oversupply of domestic flights as a key factor impacting fares. "We see multiple airlines beginning to cancel loss-making capacity, and we expect leading unit revenue performance among our largest peers in the second half of the third quarter," Kirby said.
Despite these challenges, United has managed to stand out in the U.S. airline industry, along with Delta Air Lines. Both carriers have capitalized on the surge in demand for international flights and premium services, which have been in high demand post-pandemic. United reported that premium revenue grew more than 8% year-over-year, while sales from the most restrictive basic economy tickets surged by 38%.
The airline expanded its domestic operations by more than 5% in the second quarter compared to the previous year. However, this expansion contributed to a more than 1% decline in unit revenues. Notably, yields on flights to and from Europe, a smaller portion of United's sales, increased by more than 5% compared to the same period in 2023.
Kirby highlighted that airlines have been adjusting their schedules to address the oversupply issue. He anticipates a turning point in mid-August, which should help moderate supply and support pricing power.
The industry as a whole is grappling with increased domestic capacity that has outpaced demand, leading to lower airfares. This trend has put pressure on airlines to reduce costs and maintain profitability amid rising labor and operating expenses.
In response to these challenges, United and other major carriers are planning to moderate capacity growth in the second half of the year. This strategy aims to stabilize ticket prices and protect profit margins. United has announced plans to reduce its planned domestic capacity in the fourth quarter by 3 percentage points to bolster pricing power.
Delta Air Lines, which also reported disappointing third-quarter guidance, has forecast significant improvement in pricing power from August onward. Meanwhile, Spirit Airlines recently cut its second-quarter forecast, citing weaker-than-expected revenue from ancillary services like seating and luggage fees. Southwest Airlines and American Airlines, set to report results later this month, have similarly reduced their second-quarter estimates.
Despite the forecasted challenges, United reiterated its full-year forecast for adjusted earnings of $9 to $11 per share. For the second quarter, United reported earnings of $1.32 billion, or $3.96 per share, up from $1.08 billion, or $3.24 per share, a year earlier. Adjusted earnings were $4.14 per share, exceeding analysts' expectations of $3.93.
Airfares in the U.S. fell by an average of 5.6% from a year ago in the June quarter, according to Labor Department data. Major airlines scheduled about 6% more seats in the domestic market this month than a year earlier, adding pressure on prices.
TD Cowen analysts noted United's confidence in the anticipated capacity rationalization, stating, "The long-awaited domestic capacity rationalization is imminent." Kirby's remarks on the expected reduction in capacity by mid-August align with this sentiment.
