North American airlines on slow climb to improved 2025, report says

Slower than expected revenue growth this year for the North American airline sector will likely weigh on cash flow generation and credit protection, S&P Global Ratings says in a report published today.

S&P Global Ratings has tempered its outlook for the North American airline sector following underwhelming year-to-date financial results and issuer guidance for the rest of 2024, analyst Jarrett Bilous says in "North American Airlines On Slow Climb To Improved 2025". Passenger growth is normalizing--more than we previously anticipated--following recent reports of domestic overcapacity in North America.

The slowing improvement affects earnings estimates for 2024 due mainly to meaningfully higher overall costs that adds pressure to margins. Elevated operating expenses this year are unlikely to ease any time soon. In addition, fuel prices--the second-largest expense component after labor--remain high (albeit, well below 2022 peaks) and are unpredictable.

S&P Global Ratings has taken several negative rating actions in 2024, and emergence of domestic overcapacity is a key source of risk and uncertainty. We expect a relatively measured approach to rating actions over the near-term, which incorporates our expectation for stronger year-over-year earnings and credit measures in 2025.

However, sustained pressure on airfares could have a significant impact on credit profiles across the sector. A slowing pace of passenger travel and heightened cost pressure exacerbates the impact of softer than expected passenger revenue per available seat mile on estimated credit measures.

We continue to assume year-over-year improvement in earnings and cash flow in 2025. In our view, the recalibration of growth planned for the rest of this year by much of the industry should lend support to prices. However, this cannot be assured, and weaker-than-expected operating results in 2024 or 2025 could constrain prospective credit measures from more debt and/or less cash.