By Dean Seal

Airlines are entering the back half of 2025 with a sense of caution after warning that despite their best efforts, making money from domestic flights is still a challenge while many consumers remain hesitant to spend.

"There is no question that cracks remain in the macro even if the industry is not falling apart," Morgan Stanley analysts said in a research note.

Carriers including Delta Air Lines, United Airlines and Southwest Airlines are doing what they can to respond to soft domestic travel demand after the flurry of tariffs handed down in the spring dented consumer sentiment. Many dialed back plans for capacity growth, or the number of additional seats they offer and flights they schedule.

"The ball is now in the consumers' court," the Morgan Stanley analysts said.

Most U.S. airlines withdrew their full-year financial projections in April, hoping to recalibrate after tariffs clouded their financial forecasting abilities and signs of weakening leisure and business travel emerged. "We don't know what is going to happen," American Airlines Group Chief Executive Robert Isom told investors and analysts at the time.

The quarter that followed wasn't as bad as many had feared, according to Melius Research analysts. When airlines report second-quarter results, starting with Delta Thursday, they'll likely show lower earnings but some slight revenue growth on higher capacity, largely in line with Wall Street expectations, the analysts said in a research note. Demand appears to have stabilized from the pullback earlier this year.

But it hasn't shown much of a recovery, the Melius analysts said. The booking curve is still compressed as consumers remain reluctant to lock in trips that are far out, the analysts said. Carriers also held on to too much capacity in June and July, two important months for air travel, resulting in discounting for main cabin seats in the U.S., they said.

Those factors could make for a tough third quarter. It makes sense that the airline industry didn't cut capacity in July, its most important month of the quarter, because carriers hoard cash that month even if it hurts margins, the Melius analysts said. When August and September come around, demand will cool off as schools come back into session and airlines can reduce capacity accordingly.

This year though, revenue is going to be under pressure in those off-peak months, the Melius analysts said. Corporate travel typically carries the load for those months, but it hasn't seen any improvement since pulling back at the start of the year when business confidence deteriorated.

"It's unclear it would all of a sudden snap back in August -- we can't think of a catalyst for that to happen," the Melius analysts said.

Given the tepid backdrop, airlines will have to double down on their supply discipline to get capacity in line with demand, according to several analysts. They'll likely provide muted guidance for the current quarter on revenue per available seat miles, or RASM, a hotly watched measure of how efficiently airlines convert capacity to revenue, UBS analysts said in a research note.

"Should demand not improve, we believe further capacity cuts might be needed to drive year-over-year improvement in RASMs," UBS analysts said.

Capacity reductions would pay off if demand does inflect, several analysts said. Potential tax cuts or interest rate cuts may boost spending, or consumers could get some relief from recent years of elevated inflation, leading to "a consumer that still wants to travel," Morgan Stanley analysts said.

If that doesn't happen, heavyweights like Delta and United will get some insulation from their higher-spending premium and loyalty-program fliers, but carriers with more exposure to domestic main-cabin travel will suffer, the Melius analysts said.

"If demand doesn't improve, the low end of the industry, where profitability has been elusive, will be even more challenged and could force additional change like we saw last summer," they said.

Write to Dean Seal at dean.seal@wsj.com

(END) Dow Jones Newswires

July 09, 2025 10:57 ET (14:57 GMT)

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