Leaders from across the global aviation sector gathered in Dallas last week, at the inaugural in-person Skift Aviation Forum co-hosted with Dallas-Fort Worth airport. The prevailing sentiment was simultaneously upbeat and uneasy. Participants pleased with current demand conditions but concerned about challenges ranging from cost inflation to labor and aircraft shortages.
Here are five key takeaways from the event:
- Demand for air travel is extremely strong coming out of the Covid pandemic. But it looks somewhat different than it did before the crisis. There’s no question that people want to fly after two-plus years grounded by Covid. Businesses too, are eagerly getting back in the air, never mind the merits of virtual meetings. But carriers, from American Airlines to Spirit Airlines, say travel patterns have changed. Demand, said American CEO Robert Isom, has become “more spread out” across days and seasons. More people are traveling on Tuesdays and Wednesdays, for example. September, typically a slow month for many markets, was extremely busy this year. The change coincides with the advent of more flexible work schedules, encouraging people to take “blended” trips for both leisure and business combined. Sun Country Airlines’ Jude Bricker, however, warned about too hastily drawing definitive lessons from the current trend: “We’re seven months into the recovery. So everybody just pump the brakes a little bit on making forever judgements off seven months of data.” Bricker thinks the sudden proclivity for travelling on offpeak days may simply reflect a shortage of seats relative to demand, driving up fares. “I believe many people are travelling on Tuesday today because they can’t afford to travel on the weekend. Peak fares are still really high compared to offpeak fares.”
- For airlines and their stakeholders, the risks are many. Throughout the forum, speakers tempered their enthusiasm about strong demand with warnings about the future. One worry is the economy, with inflation pressuring household and company finances alike. Some like Azul CEO John Rodgerson spoke of currency concerns, specifically the strong U.S. dollar which makes it more expensive for Brazilians and others to travel abroad. The strong dollar is also a cost headwind for non-U.S. airlines, one manifestation of the airline industry’s own struggles with inflation. High fuel costs are certainly weighing on the industry. So are rapidly rising labor costs. The latter reflects a shortage of aviation workers, most importantly pilots. Also in short supply are aircraft, caused by supply chain and regulatory headaches at Airbus and Boeing. Steven Udvar-Hazy of Air Lease Corp. says some of his aircraft are arriving six-to-seven months late (imagine a highly seasonal European airline not getting planes in time to take advantage of the summer peak). Airlines face shortages of airport and air traffic control capacity too.
- Airlines have mostly overcome their spring and summer operational challenges. “We’re ready,” said American’s Isom, responding to a question about the ability of his airline to handle the Thanksgiving rush. The fact is, airlines were not ready for the sudden resurgence in travel that began this spring, having witnessed many false starts in the preceding months. A budding recovery in late 2021 was curtailed by Covid’s Delta variant. Another in early 2022 was checked by Omicron. So many carriers were caught flat-footed, with too few planes and people on hand. Delays and cancellations became headline news. By the fall, however, a combination of capacity cutting and aggressive hiring helped stabilize the situation, and schedule disruptions have declined significantly. One effect of cutting capacity though, is that fares are much higher now than they were pre-pandemic. Operational challenges, to be sure, still remain. Spirit, for one, talked about air traffic control congestion in Florida. Bricker and others stressed the difficulties associated with pilot training backlogs.
- Technology is changing the industry: Azul’s Rodgerson, for one, spoke of the tendency for airlines to invest heavily in planes but neglect investments in technology. Activity is building though. The chief customer officers at both Delta Air Lines and United Airlines shared ways in which tech initiatives are making life easier for their passengers. They include things as simple as more functional mobile apps, for example, as well as things like Delta’s “parallel reality” trials at its Detroit hub — this enables multiple customers to look at a single boarding screen and only see their own personal information. Airports too, are adopting new technologies to improve passenger throughout — biometric boarding, for example. Expedia, a major distributor of airline tickets, has its own tech solutions in development. More speculative is the future of electric vertical takeoff and landing, or eVTOL, aircraft envisioned for use as air taxis for commuting to airports. Sean Donohue, CEO of DFW airport, says his organization — with help of McKinsey — is preparing for the advent of eVTOLs. But many uncertainties linger, like how to get passengers from the aircraft to their correct terminal — DFW has five of them. The planes will also use “a tremendous amount of power” that the electricity grid will need to support. Donohue also wonders about the economics of planes seating just four or five people. “How much do you want to put into infrastructure to facilitate the movement of five or six people.” Even if there are 100 flights a day, that’s only 500 to 600 people, or about 200,000 people a year. In 2019, DFW airport handled 75 million people.
- The challenge of creating sustainable aviation looms ever larger. “There are no easy or short-term solutions. We’re all just trying to figure it out together.” So said Delta’s Vice President for Sustainability Amelia DeLuca, on a panel at the event entitled “Sustainability Roadmaps and the New Path to Net Zero.” The fact remains that aviation is a hard-to-abate sector in terms of carbon reduction, with fuel emissions responsible for the vast majority of those emissions. The problem is, electric airplanes make sense — maybe — for just the very smallest of commercial planes. And alternatives to hydrocarbon-based jet fuel, though they exist, do so in negligible quantities. As DFW’s Donohue noted, sustainable aviation fuels (SAF) aren’t even available yet at non-coastal city airports. Nevertheless, the industry is banking on SAF to provide a big part of the solution over time, hopefully aided by scaled up production and government incentives. Interestingly, John Thomas of the startup Connect Airlines discussed his plans for hydrogen-powered regional planes (ATR turboprops, specifically). Sustainability efforts, however, are not limited to aircraft propulsion. Donohue, for one, talked about the use of renewable wind power at DFW. Corporations, meanwhile, have their own goals to cut emissions, often by reducing their carbon footprint while traveling. But ultimately, cleaner fuel is the key to addressing the problem. “The good news,” said DeLuca, “is I know what the problem is. The problem is jet fuel … The bad news is that there’s literally no solution for that today at scale.”
In Other News
- Copa Airlines is back to what it does best: Making a lot of money. The airline, based in Panama, reported a fantastic 18 percent operating margin for the July-September quarter, just a point shy of its 19 percent figure in the third quarter of 2019. Unit costs rose 16 percent but unit revenues rose 15 percent. Like many airlines around the world, Copa is benefitting from extremely robust revenue and demand conditions but simultaneously grappling with surging costs. Management is currently negotiating new work contracts with pilots and flight attendants. In the meantime, its capacity, measured in available seat miles (ASMs), is now greater than it was before the crisis, with plans to grow another 15 percent in 2023. That includes expansion undertaken at Wingo, its low-cost unit based in Colombia. Copa itself is adding more Boeing 737 Max aircraft. Will it make money again this quarter? It sure will. The airline told investors to expect a 22 percent fourth quarter operating margin. Wow.
- At a Deutsche Bank event, Europe’s Lufthansa Group gave a brief update on the various entities in its business, including the airlines Austrian and Swiss, which both enjoyed strong profits this summer. Eurowings Discover is the group’s latest attempt to capture longhaul leisure traffic, modeled on its Edelweiss operation in Switzerland. The group has giant cargo and maintenance divisions as well. “Having already returned to profitability in the past quarter,” said investor relations head Shreya Parmar, “we now aim to further increase our earnings power and generate sustainably higher cash flows.” She added, “the signs that we see are good for this because global aviation will not return to the overcapacities we witnessed in pre-pandemic times anytime soon.” Reasons why include “global supply chain bottlenecks” causing “massive delays” in the delivery of new aircraft, not to mention the repair and overhaul of existing aircraft. Parmar cited an example involving Boeing 787 cockpit windows that were “nearly impossible” to obtain. Besides industry supply constraints, another tailwind for Lufthansa’s future earnings is the shortage of airline workers. “The many still-unfilled vacancies at airports, ground service providers, and security organizations continue to limit any capacity expansion.” Capacity expansion, furthermore, is also checked by high costs. Revenues from business travel, she said, have reached just 60-70 percent of pre-crisis levels (Asia’s delayed reopening has a lot to do with that). Leisure and family-visit travel, however, is booming. “For many people, travel has obviously become more important in their hierarchy of needs, especially in the U.S.” Japan, a high-yield market for Lufthansa, is starting to improve. It hopes Hong Kong and later mainland China will follow.
- Air France-KLM has made several moves to repay the aid it received from the French state. Last week, it sold €305 million ($316 million) in deeply subordinated convertible bonds in the market. Proceeds from the oversubscribed issue will be used to repay perpetual bonds held by the French government. The notes that are scheduled to close on November 21 carry a nominal interest rate of 6.5 percent. And before the issue, Air France-KLM reached an agreement with the lenders of its French state-backed loans to repay €1 billion of the €3.5 billion outstanding early. Under the revised terms, the group will make an €800 million payment in May, and another €200 million payment in May 2024. The balance is due in two additional payments: €1.15 billion in May 2024 and €1.35 billion in May 2025.
- Arguments in the U.S. government’s suit against American and JetBlue Airways‘ northeast alliance wrapped up last week. Now, U.S. District Judge Leo Sorokin must review the hundreds of pages of documents both sides submitted and weigh their arguments. The AP reported that a decision is still likely “weeks away.”
- It’s not a fun time to be SpiceJet. The Indian LCC spilled buckets of red ink last quarter, resulting in a gruesome negative 30 percent operating margin. Third quarters are not typically good ones for Indian carriers — it’s an offpeak period. More importantly, though, high fuel prices, made worse by a weak rupee, is spoiling the benefits of a strong demand recovery. SpiceJet does have a sizable cargo business that’s doing well. Its passenger business, though, has a history of trouble, resulting in periodic financial crunches. It’s more recently run into safety-related concerns that have led regulators to restrict its capacity. Competition is certainly intense. There’s IndiGo, the 800-pound gorilla in the domestic market. New airlines are entering as well, including Akasa most recently.
- Thailand’s tourism rebound lifted Thai AirAsia, the country’s largest domestic airline, in the third quarter. Despite only flying 48 percent of its 2019 capacity during the period, load factors were up and revenue per available seat kilometer (RASK) was up 21 percent. That wasn’t enough, however, to return the discounter to the black: Thai AirAsia lost 4 billion Thai baht ($113 million) in the third quarter which it attributed to the strong U.S. dollar. Revenues were down 49 percent compared to 2019 to 4.9 billion baht. The airline expects Thailand’s tourism numbers to hit 10 million international arrivals for the year and, under a “best case” scenario, 30 million in 2023. The country saw 40 million foreign visitors in 2019 with many coming from China that, to date, remains all but closed for international travel.