CHICAGO/LONDON, July 22 (Reuters) - Record summer travel

demand was tipped to translate into bumper earnings for airlines

- but quarterly reports are looking less than stellar.

While plenty of customers are flocking to travel

destinations worldwide, airlines are finding an excess supply of

seats in the price-sensitive end of the market has forced them

to discount fares to fill their planes.

This week, earnings from American and Southwest

Airlines ( LUV ) are expected to deliver more bad news following

downbeat outlooks for the quarter from United, Delta

, Alaska Airlines, and Ryanair.

Airline executives attributed the overcapacity to an

overoptimistic view of travel demand, which by most standards

has been robust.

Passenger traffic in the U.S. is hitting records levels this

year. In the first six months, the U.S. Transportation Security

Administration (TSA) screened an average of about 2.46 million

airline passengers per day, up 6% from last year.

"It was just that airlines were hoping that it (demand) was

going to be even stronger," Alaska's CFO Shane Tackett said in

an interview.

In addition to the discounting pressure, new labor contracts

and higher lease rates and maintenance costs have driven up the

industry's operating expenses.

In May, American slashed its second-quarter profit forecast,

citing weaker pricing power in the domestic market, and while

the Texas-based carrier has vowed a reboot, analysts say

reversing course will be time-consuming and costly.

"American's network leaves it more exposed to the markets

currently most oversupplied and less able to offset the higher

cost environment," said TD Cowen analyst Thomas Fitzgerald.

Southwest ( LUV ) has been hit hard by Boeing's jet delivery delays,

and it is under pressure from an activist investor to oust its

CEO, overhaul the board, and shake up its business.

The low-cost carrier has cut its second-quarter revenue

outlook. Fitzgerald said Southwest ( LUV ) has few levers to materially

boost its revenue performance, raising the risk to its balance

sheet.

Both American and Southwest ( LUV ) will report earnings on

Thursday.

EUROPE'S POSSIBLE STRUGGLES

The first quarter for European airlines was tougher than

anticipated, and Ryanair's second-quarter results

offered little solace for investors on Monday.

Ryanair's profits slumped by almost half for the quarter

after ticket prices plunged 15% as customers balked at higher

prices.

Analysts warn these pricing worries could spread across the

sector in Europe. "More aggressive pricing by the market leader

is likely to result in adverse fallout for the other European

airlines," Liberum analyst Gerald Khoo said in a note.

Deutsche Lufthansa slashed its 2024 earnings

guidance for a second time and issued a profit warning for its

second quarter last week due to weaker yields.

Earnings of British budget carrier easyJet on Wednesday and

Air France-KLM on Thursday will add clarity to the

cost and revenue pressures, with some fearing that Air

France-KLM may not be able to bounce back from a weaker first

quarter.

European airline shares fell across the board on Monday,

with Ryanair the hardest hit, down 14%.

Wizz Air ( WZZAF ) CEO Jozsef Varadi said the budget carrier was still

expecting yields to go up long-term, although it did face

limitations tied to RTX engine checks, grounding a number of its

fleet.

"I think we are doing better than this," Varadi told

Reuters, referring to Ryanair's challenges over softer pricing.

U.S. airlines are now moderating capacity. Annual domestic

seat growth is estimated to slow to 3% in the September quarter

from 6% a quarter ago. Some carriers hope this will boost their

pricing power, but that may not be enough to increase earnings.

United currently expects full-year earnings to fall to the

low end of its $9-to-$11 per share forecast. The company is

banking on rivals to further reduce unprofitable flying to help

lift profits.

"While we see this incredible inflection upon us in the

industry, the precise timing and magnitude is difficult to

call," United's President Brett Hart told investors on Thursday.