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Already in a fragile state due to persistently high interest rates and inflation, consumers are becoming even more cautious as economic growth concerns arise amid President Trump's tariff push. Up until now, travel demand had remained impressively resilient, but some consumers have now reached a breaking point, and the fallout was on display last night and this morning when a slew of airlines cut their Q1 outlooks.

Delta Air Lines (DAL) started the barrage of guidance cuts after the close yesterday, slashing its Q1 EPS outlook to $0.30-$0.50 from its prior forecast of $0.70-$1.00 while lowering its revenue growth projection to 3-4% from 7-9%. United Airlines (UAL), American Airlines (AAL), and Southwest Air (LUV) followed suit this morning with each company lowering their expectations for Q1.

• The main issue that's creating turbulence for each of these airlines is that domestic leisure travel demand has softened recently, especially within lower income consumer cohorts. This should impact LUV disproportionately given that it has virtually no international exposure. However, unlike DAL, UAL, and AAL, its stock is trading sharply higher due to another significant development.
• Specifically, LUV also announced that it's ending the "bags fly free" service that famously distinguished itself from its competitors. While Rapid Rewards A-List preferred members will still be offered two free checked bags, and A-List members will get one free checked bag, customers who do not qualify for either group will be charged for their first and second bags. The changes, which will take effect on May 28, 2025, and have been pushed by activist investor Elliott Investment Management, will provide LUV with a new, significant revenue stream. 
• Whether the new baggage fees lead to some market share losses remains to be seen, but LUV's lack of revenue diversity has put it at a major disadvantage relative to the other major carriers. On that note, DAL commented that ongoing strength in the premium, loyalty, trans-Atlantic, and Pacific businesses should help to soften the blow from the downturn in domestic leisure. In Q4, premium revenue growth outpaced main cabin growth at 8% compared to 2%.
• The sweeping layoffs that have hit the government sector are also hurting travel demand. UAL highlighted this headwind, estimating that government-related travel has plunged by 50%. While the government vertical only accounts for about 2% of UAL's total business, that percentage climbs to about 4-5% when tacking on all the consultants and adjacent industries that go along with it. Therefore, the impact to UAL's Q1 revenue will be material.
• The good news is that fuel prices have dropped considerably in recent weeks. DAL stated that oil prices are down by about $10/barrel from peak levels during the quarter, providing some relief on the cost side. Additionally, the industry continues to ratchet capacity lower, which will help to align supply with demand.

The airline industry has enjoyed a boom period over the past few years as consumers have shifted their spending towards experiences and as corporations have returned to in-person meetings. Cracks that have emerged in that bullish cycle over the past couple of quarters are now widening as the impact of tariffs have amplified consumers' anxieties about the economy.