JetBlue Airways (JBLU, Financial) recently raised its Q4 revenue outlook, sparking a rally in the airline sector. In response, Southwest Air (LUV, Financial) and American Airlines (AAL, Financial) also increased their Q4 forecasts, driven by strong travel demand and improved pricing as industry capacity moderates.
- Despite strong travel demand, Southwest Air (LUV, Financial) and American Airlines (AAL, Financial) have faced challenges:
- LUV's outdated business model and lack of international flights have hindered its ability to capitalize on premium trends. Its Q3 operating margin was 0.5%, compared to Delta Air Lines (DAL, Financial) at 8.9%. LUV plans to introduce assigned and premium seating in 2H25 to boost margins.
- Activist firm Elliott Investment Management has influenced LUV's board to enhance efficiency by reducing costs and optimizing routes. LUV's CASM-ex rose by 11.6% in Q3, with a projected 11-13% increase for Q4, reaffirmed in a recent filing.
- AAL is recovering from a flawed sales strategy that cut its sales force and prioritized passenger load over premium products. CEO Robert Isam's corrective measures are showing results, as AAL raised its Q4 EPS guidance to $0.55-$0.75 from $0.25-$0.30.
Despite macroeconomic challenges, travel demand is robust, and the holiday season looks promising for LUV, AAL, and others. While costs are high, these airlines are well-positioned to enhance profits through improved pricing power and focus on high-margin opportunities like premium seating.
