Consumers, already strained by high interest rates and inflation, are becoming more cautious due to economic growth concerns linked to tariff policies. Until recently, travel demand remained strong, but it has now started to wane, prompting several airlines to revise their Q1 forecasts.

Delta Air Lines (DAL, Financial) led the wave of guidance cuts, revising its Q1 EPS forecast to $0.30-$0.50 from $0.70-$1.00 and lowering its revenue growth outlook to 3-4% from 7-9%. Following Delta's lead, United Airlines (UAL, Financial), American Airlines (AAL, Financial), and Southwest Air (LUV, Financial) also reduced their Q1 expectations.

• Domestic leisure travel demand has softened, particularly among lower-income consumers, impacting airlines. Southwest (LUV, Financial), with minimal international exposure, is expected to feel this impact more acutely. However, its stock is up due to a strategic change.
• Southwest announced the end of its "bags fly free" policy. Starting May 28, 2025, non-qualifying customers will be charged for checked bags, creating a new revenue stream, influenced by Elliott Investment Management.
• While new baggage fees might affect market share, Southwest's revenue diversity is limited compared to its peers. Delta (DAL, Financial) noted that strength in premium, loyalty, and international sectors might offset domestic leisure declines, with premium revenue growing 8% in Q4 compared to 2% in the main cabin.
• Government sector layoffs have also reduced travel demand. United Airlines (UAL, Financial) reported a 50% drop in government-related travel, which, along with related industries, constitutes about 4-5% of its business, significantly impacting Q1 revenue.
• Fuel prices have decreased, with Delta (DAL) noting a $10/barrel drop, providing cost relief. The industry is also reducing capacity to better match supply with demand.

The airline industry has thrived as consumer spending shifted to experiences and businesses resumed in-person meetings. However, recent quarters have seen growing challenges amplified by economic anxieties tied to tariffs.