Allegiant’s Margin Led U.S. Airlines in Fourth Quarter
Pushing Back: Inside the Issue
Reliving bad memories is never pleasant. But Southwest Airlines didn’t have much of a choice as it faced a barrage of hostile questions about its holiday fiasco. How did it happen? What are you doing to ensure it never happens again?
The setting was Capitol Hill. And interestingly, Southwest sent its chief operating officer Andrew Watterson, not its CEO Bob Jordan. There, Watterson was under fire not just from Senators but also from the airline’s pilot union.
Outside the Beltway, Southwest’s smaller rival Frontier Airlines reported a full-year loss for 2022, joining JetBlue, Hawaiian, and Spirit in the red column. Frontier did make money in the fourth quarter, but not much. JetBlue and Spirit themselves are laying out arguments why regulators should allow their merger. In the meantime, there’s another possible merger in South America as JetSmart wants to grab hold of Viva Air. Avianca’s not happy about that. There’s not much happiness in Brazil either, where Azul and Gol are apparently fighting to stave off a bankruptcy filing.
The pace of earnings season picks back up this week, headlined by Air France-KLM and Air Canada on Friday. What will they have to say?
Airline Weekly Lounge Podcast
Spirit lags other U.S. airlines in financial performance. In fact, it lost money last year while most of its peers produced profits. Can it fix its cost problems and restore order? Plus, Azul may be in trouble. Listen to this week’s episode to find out. A full archive of the Lounge is here.
Southwest Airlines Chief Operating Officer Andrew Watterson promised lawmakers “hundreds of millions of dollars” in additional upgrades to the carrier’s winter operations infrastructure while in Washington, D.C., during a hearing last week.
“We messed up,” he said at a hearing of the U.S. Senate’s Commerce, Science, and Transportation Committee. The disruption over the Christmas and New Years holidays resulted in the cancellation of roughly 17,000 flights at the end of 2022, and cost Dallas-based Southwest $850 million in the fourth quarter alone.
Watterson said the root cause of the meltdown, which Senator Ted Cruz (R-Texas) described as an “epic screwup,” was a large winter storm that swept across the U.S. in the days before Christmas. That disrupted operations for all airlines but, after many of its crews were displaced due to cancelled flights, and Southwest lost track of them, the carrier was forced to fully reset its operation — resulting in more cancellations — to recover.
Watterson downplayed the role of technology in Southwest’s operational issues, describing it as an “end of the line” factor. The airline’s crew assignment software, SkySolver, has been widely scrutinized following the disruption.
“The bigger element of the disruption was how we handled the storm itself,” he said, adding that in hindsight Southwest’s preparedness for severe winter weather was “insufficient.”
“Our biggest investment this year is going to be how we handle winter operations,” Watterson said. He declined to be more specific on the costs beyond saying “hundreds of millions of dollars.” Southwest plans to invest $1.3 billion in technology this year, up from about $1 billion previously.
Senators did not appear satisfied with Watterson’s explanations and contrite remarks. Senator Maria Cantwell (D-Wash.), who chairs the commerce committee, noted pointedly that Southwest’s CEO Bob Jordan was invited — but did not attend — the hearing, and pushed Watterson on the timeline for upgrades to the airline’s crew assignment software.
“Your CEO didn’t want to show up,” she said, adding that Southwest’s legendary long-time former CEO Herb Kelleher “would be here.” Kelleher led the airline from 1981 to 2001; he passed away in 2019.
The upgrades to Southwest’s crew assignment system, known as SkySolver, will be complete on Friday, February 10, Watterson said. Additional upgrades and investments will be determined following the completion of several reviews, including one by outside advisor Oliver Wyman, that are expected in March.
Senator Ed Markey (D-Mass.) called the fact that Southwest knew of its operational shortcomings “absolutely unacceptable” after Watterson confirmed it was aware of concerns raised before the meltdown by its pilots union, the Southwest Airlines Pilots Association (SWAPA).
“Southwest struggles to manage any disruption,” SWAPA President Captain Casey Murray said at the hearing. The union submitted data showing that the airline has seen an uptick in operational meltdowns over the past decade — as it grew but continued to use many older technology platforms — averaging one every 18 months since 2011.
Southwest will reduce executive bonuses for 2022 by an undisclosed amount as a result of the meltdown, Watterson said. The airline does not intend to halt investor dividend payments.
Senators on both sides of the aisle also used the hearing as an opportunity to raise the issue of potential new regulation on air traveler rights. Markey said he plans to re-introduce legislation that would bar airlines from charging fees for families to sit together onboard flights. And Senators Cruz and Moore Capito (R-W.V.) both challenged the idea that new regulation would improve service.
Additional regulation “would also predictably drive up the cost of air travel, and price many Americans out of the market,” Cruz said. He specified that his comments did not include safety regulations, which is an “integral responsibility” of the government.
JetSmart Bids for Viva Air, Latam Complains
Chile’s JetSmart wants to buy Colombia’s Viva Air in the latest twist to South America’s ongoing round of airline consolidation. The offer, and a separate complaint by competitor Latam Airlines Group to Colombia’s civil aviation regulator, are the latest stumbling blocks to Avianca’s proposed merger with Viva Air that has been held up on competition grounds.
“We believe that a merger between JetSmart and Viva Air will allow us to maintain the ultra-low-cost model in Colombia, helping to continue offering more routes at lower prices,” JetSmart CEO Estuardo Ortiz said last week. He added that such a combination, between two budget airlines, would preserve competition in Colombia.
JetSmart is backed by U.S.-based private equity firm Indigo Partners, which is known for its successful investments in low-cost carriers around the world, including Frontier Airlines, Volaris, and Wizz Air. American Airlines plans to take a minority stake in JetSmart under a deal that was approved by Chilean regulators in January.
The offer for Viva Air comes less than a month after Colombia’s aviation regulator, Aerocivil, said it would re-evaluate the airline’s proposed merger with Avianca after the airlines offered concessions aimed at preserving competition. The regulator first rejected the tie-up in November. Avianca and Viva Air were Colombia’s first and third largest carriers in 2022, with respective 45 percent and 20 percent shares of domestic seats, according to Diio by Cirium schedule data.
And Latam, Colombian news magazine Semana has reported, sent a letter to Aerocivil raising concerns over a lack of transparency in the review process. Latam is the second largest airline in Colombia, between Avianca and Viva Air.
South America is awash in potential airline consolidation deals. In addition to the proposed Avianca-Viva Air combination, Avianca and Brazil’s Gol are separately seeking to merge and create the new airline holding company, Abra. The new group could also eventually include Chile’s Sky Airline. American has invested in Gol, and plans to invest in JetSmart, as part of expanded commercial partnerships. And, in 2021, Azul tried unsuccessfully to acquire Latam’s Brazilian franchise in an effort to further strengthen its share in South America’s largest market.
Avianca’s plan to form Abra with Gol is separate from its proposal to acquire Viva Air, executives have said. JetSmart’s interest in Viva Air, if successful, is unlikely to disrupt that combination of the Brazilian and Colombian airlines.
An Avianca spokesperson said JetSmart’s offer was an “unfeasible proposal to generate a distraction” from the pending Avianca-Viva air combination. In addition, with the airline as a controlling shareholder in Viva Air, Avianca has a say in any potential sale to JetSmart.
In an October interview, Ortiz said the Latin American aviation market was becoming more competitive post-pandemic following the restructurings of Avianca and Latam, and the proposed mergers in the market. He did not express any interest in acquiring Viva Air or any other airline at the time.
“You’ll see a market with probably fewer players but more efficient,” he said. “So “I do expect a more competitive region … This is something that we thought was coming and I think it is still coming our way.”
A JetSmart-Viva Air merger would give the former a strong franchise in Colombia where it has a limited presence today. JetSmart has domestic operations in Argentina, Chile, and Peru; the former followed its 2019 purchase of Norwegian Air’s Argentina business. The airline serves just three cities in Colombia — Bogotá, Cali, and Medellin — from Santiago and Antofagasta in Chile, Diio schedules show.
Viva Air operates almost exclusively within Colombia or on international routes from the country. It also has a Peruvian subsidiary but that carrier only operates three routes from Lima to Bogotá and Medellin, as well as to Cuzco, according to Diio.
The two airlines also have complementary fleets. JetSmart operated 23 Airbus A320 family aircraft, including nine A320neos and three A321neos, at the end of January, according to Airbus’ latest data. Viva Air also operated 23 A320 family jets, including 12 A320neos.
Viva Air has struggled financially since the pandemic despite the rebound in travel demand. The weak Colombian peso against the U.S. dollar and high fuel costs have added to its challenges. Many expenses, including aircraft leases and fuel expenses, are due in dollars.
“Staying independent in aviation in the 2020s is not an option. It was hard pre-pandemic. It’s not an option now,” Viva Air CEO Felix Antelo said in an argument for the airline’s merger with Avianca in October.
In Other News
- The U.S. Department of Justice may be preparing to sue to block the merger of JetBlue and Spirit Airlines, Politico reported late last week. The move is not entirely a surprise given the anti-consolidation statements by Biden administration officials. It is also not necessarily the end of the deal, the DOJ moved to block the American–US Airways merger in 2013 only to reach a settlement allowing the deal to go through several months later. JetBlue and Spirit’s lawyers are likely to work towards a negotiated settlement with DOJ officials if the regulator officially moves to block the merger, something Politico reported could happen as soon as March.
- Azul has engaged adviser Seabury, and law firm Weil to advise it on a possible restructuring, Air Finance Journal has reported. While the airline hasn’t commented, the fact that it is restructuring now — when revenues are well ahead of 2019, and passenger numbers are way up — suggests some combination of the weak Brazilian real and high U.S. dollar obligations weighing on the carrier. The real depreciated roughly 30 percent against the U.S. dollar from 2019 to 2022, significantly eating into the revenue gains Azul has made. At the same time, expenses have skyrocketed, not least fuel which was up 134 percent compared to 2019 in the third quarter. And Raymond James analyst Savanthi Syth has highlighted Azul’s aircraft lease obligations as a top area of concern; the airline is expected to have a cash shortfall of roughly 3 billion Brazilian reais ($572 million) this year. Talks are underway with counterparties to defer payments or raise cash worth roughly 4 billion Brazilian reais. “We believe bankruptcy filing is a lower probability event … albeit one that cannot be completely ruled out,” Syth wrote.
- Frontier became the final major U.S. airline to publish and discuss its fourth-quarter financial results. They were underwhelming, headlined by a modest 5 percent operating margin. It earned double that in the same quarter of 2019. In addition, its fourth-quarter profits weren’t enough to avoid a full-year loss, joining Hawaiian, JetBlue, and Spirit as the only scheduled U.S. carriers (of the 11 that are publicly traded) to post losses for 2022. Frontier did say it continues to see “robust” demand for future travel.
- Kuwait-based LCC Jazeera Airways reported a $24 million operating profit on a 25 percent year-over-year increase in revenues to $111 million in the December quarter. The airline, one of a growing number of budget carriers in the Gulf, flew 85 percent more capacity during the period than three years earlier. For the full year, Jazeera posted an $88 million operating profit on 127 percent higher revenues of $595 million. Jazeera plans to add two Airbus A320neos to its fleet in 2023, which will raise its total aircraft count to 21 by year-end.
- U.S. regional Mesa Airlines posted a small operating profit of $2.4 million in the December quarter, including a one-time $3.7 million impairment charge related to the end of its contract with American and agreement to transition 38 Bombardier CRJ900s to flying with United Airlines. Revenues were flat year-over-year at $147 million on a 41 percent drop in block hours. Mesa CEO Jonathan Ornstein spoke last week of improvements to “operational performance and both our income statement and balance sheet” as the airline completes the shift to becoming an all-United partner in April. However, a shortage of captains, and elevated pilot attrition, continue to be an issue that Ornstein does not expect to fully ease for 12-18 months — or until mid-2024.
- IATA, in its latest monthly traffic update, said last year’s air traffic volumes, measured in revenue passenger kilometers (RPKs), reached 69 percent of 2019 levels. Demand improved as the year progressed, however, and by December, traffic was 77 percent of where it was three years earlier. Looking ahead, IATA sees “early signs of recovery” for China’s domestic markets. China is the world’s second-largest airline market after the U.S. but is only now relaxing travel restrictions.
- On the labor front, Copa Airlines reached new three-year tentative agreements with both its pilots and flight attendants earlier in February. The deals, which were reached with the help of Panama’s Ministry of Labor and Labor Development, avoided a planned industrial action. Pilots at Hawaiian, represented by the Air Line Pilots Association (ALPA), last week ratified a new four-year accord that provides 32 percent raises over the duration of the contract. And Southwest‘s roughly 500 dispatchers (represented by the Transport Workers Union) and facilities maintenance technicians (represented by the Aircraft Mechanics Fraternal Association) have ratified new four-year contracts. Both Southwest accords include pay and quality of life improvements while easing work rules.
- Australian budget startup Bonza operated its first flight, between Sunshine Coast and Whitsunday Coast, on January 31. The airline aims to stimulate the market by charging low, a la carte fares on routes between, primarily, secondary Australian cities and leisure spots. Bonza will not, CEO Tim Jordan has said, challenge Qantas and Virgin Australia on the country’s trunk routes, primarily the Sydney-Melbourne-Brisbane triangle. Bonza received its air operators certificate in January.
- People moves: Charles Duncan, a former WestJet and United executive, is the new president of Norse Atlantic Airways. He oversees the longhaul startup’s commercial, operations, network, and people functions in the new role, and reports to CEO Bjorn Tore Larsen.
Clarification: In last week’s issue, we mentioned that Japan Airlines was more international than All Nippon. ANA is in fact larger now, in terms of international capacity. But JAL still gets a larger percentage of its total revenues than ANA does, from mainline international flying.
- American priced a $750 million senior secure private term loan with a 7.25 percent interest rate last week. That’s steep, but not surprising, given proceeds partially repay debt — the $1.75 billion outstanding under American’s 2013 secured term loan facility due in 2025 — that carried an average variable rate of 4.83 percent in the third quarter. High interest rates have pushed up the cost of borrowing for many companies. The maturity of the balance of the 2013 facility, roughly $1 billion, will be extended to 2028. A pool of selected gate, slot, and route assets from American’s U.S. operations, as well as to Australia and New Zealand, secure the new debt.
- Bain Capital is moving forward with plans for an initial public offering for Virgin Australia. The private equity firm aims for a valuation of roughly A$3 billion ($2.1 billion) upon listing, the Australian Financial Review has reported. Goldman Sachs and UBS are in the running to manage the IPO. Bain took Virgin Australia private when it acquired the airline out of administration in 2020. The airline made a roughly A$125 million profit during the six months ending in December.
- Allegiant Air has agreed to a new up to $100 million senior secured revolving credit facility with a three-year term. The credit line carries a variable interest rate priced over the secured overnight financing rate, or SOFR. Proceeds of the new revolver, which is secured by a collateral pool of aircraft and engines, will be used for general corporate purposes. It replaces a $50 million revolver that expires in March.
- Southwest exercised options for 10 Boeing 737-7s in January. The Dallas-based carrier’s additional 737 Max commitments bring its total firm orders to 427 aircraft, split between 192 -7s and 235 -8s, with deliveries through 2030. Southwest is contractually scheduled to take delivery of 136 Maxes this year. However, with certification of the 737-7 still pending, it expects to take roughly 100 aircraft.
- Norwegian Air hasn’t wasted anytime taking advantage of Flyr‘s collapse. Last week, the discounter unveiled a deal with Air Lease Corp. for six former Flyr Boeing 737-8s. All of the aircraft would be delivered to Norwegian by “summer” — whether that is the IATA summer schedule that begins at end-March, or the official start of summer in June is unclear.
- Good news in the development of hydrogen fuel-cell powertrain technology. The U.S. Federal Aviation Administration has authorized Universal Hydrogen to begin test flights of its fuel cell technology on a Dash 8-300 testbed, following successful taxi tests in Moses Lake, Wash. No date yet for the first test flight but, if all goes well, Universal Hydrogen aims to deliver the first commercial aircraft, an ATR 72-600, with its low-emission fuel-cell technology to airlines by 2025. It is worth noting that Universal Hydrogen had aimed to begin test flights by the end of last year.
- Speaking of zero-emission aircraft, Air New Zealand has added Airbus, ATR, Embraer, Heart Aerospace, and Universal Hydrogen to the list of companies working to develop a zero-emissions replacement for its 50-seat Dash 8-300 fleet. The airline previously engaged Beta, Cranfield Aerospace, Eviation, and VoltAero on electric, hybrid-electric, and hydrogen fuel cell technology. The airline plans to begin revenue flights with a commercial demonstrator by 2026, and begin replacing its Dash 8s from 2030.
- Spirit AeroSystems (no relation to Spirit Airlines) used its fourth-quarter earnings call to provide more detail on the industry’s much-discussed production woes. It recounted the many frustrations of 2022, including Inflation, labor pressures, high levels of worker attrition, and increased training for new hires. “These challenges have resulted in higher-than-anticipated costs and disruptions in our factories,” the company said. The problem is far from over, with supply chain bottlenecks and heavy training time still ongoing. A critical supplier to both Boeing and Airbus, Wichita-based Spirit aims to produce shipsets for 650-680 A320s this year, along with 420 737 Maxes, 80 A220s, 60 A350s, and 40-45 787s. “I would say though that the supply chain situation is under better control than we were last year. There are still challenges, but it’s definitely improving.”
Routes and Networks
JetBlue is in clear selling mode of its proposed merger with Spirit as the U.S. Justice Department weighs the combination that would create the country’s fifth largest airline.
In a filing with the Department of Transportation last week, JetBlue said new service to Hawaii — a market neither JetBlue nor Spirit serves today — as well as eight other routes, would be possible if the $3.8 billion combination is approved by regulators. The potential new routes were mentioned by the New York-based carrier in a standard request to transfer Spirit’s international route authorities to JetBlue.
“With more flexibility, greater resources, and an expanded route network, the JetBlue/Spirit combination will be better positioned to take advantage of the now largely liberalized international operating environment and better utilize U.S. rights under applicable air transport agreements, thereby increasing service alternatives for consumers,” JetBlue said.
JetBlue and Spirit’s touting of their merger’s potential consumer benefits comes as the Biden Justice Department has taken a hard line on large business combinations. The antitrust regulator took American Airlines and JetBlue to court over their alliance in the northeast claiming it hurt consumers; a verdict in the case is expected anytime. And administration officials have repeatedly spoken out against further consolidation in already highly-consolidated industries.
American, Delta, Southwest, and United — colloquially known as the Big Four — carried 79 percent of all U.S. domestic flyers during the year ending in October, the latest Bureau of Transportation Statistics data via Cirium show. JetBlue and Spirit carried 3.9 and 4.4 percent of travelers, respectively.
“This isn’t Pepsi and Coke merging,” JetBlue President and Chief Operating Officer Joanna Geraghty told Reuters last week.
Spirit CEO Ted Christie said last week that he expects an initial decision from the Justice Department in the “next 30 days or so.”
On the growth opportunity for a combined JetBlue-Spirit, potential Hawaii flights would be possible with more facilities at Los Angeles International Airport, or LAX, JetBlue told the DOT. The carriers’ combined gates at the notoriously gate-tight airport would allow for better facility utilization, and the potential addition of flights to the islands popular with leisure travelers.
Another opportunity for JetBlue assuming it completes the merger is the expansion of its Fort Lauderdale base into a true connecting hub into the Caribbean and Latin America. This would challenge American’s existing hub down the road in Miami. Potential new routes include ones to Antigua, Belize City, Cincinnati, Liberia (Costa Rica), Memphis, Minneapolis-St. Paul, and Savannah, the filing states. Limits on international gates at the South Florida airport currently restrict the airline from offering many connections over Fort Lauderdale, where it instead focuses primarily on local traffic.
JetBlue also outlined 15 other international markets where connections would be competitive with existing flight options. These markets include multiple U.S. gateways, including Charlotte, Denver, Detroit, and San Francisco, to Caribbean and Latin American destinations like Guatemala City, Nassau, Quito, and San Pedro Sula.
JetBlue and Spirit target closing their merger by the first half of 2024.
- Delta is adding two new routes to South America, including one with new joint venture partner Latam Airlines. The SkyTeam carrier will connect New York JFK and Rio de Janeiro Galeao daily under its Latam pact with a Boeing 767-300ER from December 16. And, outside of the partnership that does not cover Argentina, Delta will link JFK and Buenos Aires Ezeiza daily with a 767-400ER from October 28. Both routes will operate seasonally through the winter. Delta and Latam promised at least nine new U.S.-South America routes under their joint venture; the new Rio route brings the total so far to three, including Latam’s new links to Los Angeles and Orlando.
- Speaking of Latam, South America’s largest airline will add three new routes across its network in April. The carrier will offer a daily flight from Bogotá to Guayaquil, Ecuador; a daily flight from Lima to Brasilia; and thrice weekly flights from Santiago, Chile, to Porto Alegre, Brazil. Bogotá, Lima, and Santiago are hubs for Latam.
- It was only a matter of time before British Airways found a way to fill the gap left by the collapse last year of its long-time South African franchise carrier, Comair. British Airways has inked a new codeshare partnership with Airlink, the rapidly growing South African carrier that used to provide regional feed for beleaguered state-owned South African Airways. The new partnership covers 18 Airlink destinations in Namibia, South Africa, Zambia, and Zimbabwe served via Cape Town, Johannesburg from February 15.
- Ryanair is adding 12 new routes from a number of gateways this summer. Edinburgh will gain six nonstops to Belfast, Bournemouth, London Stansted, Newquay, Rhodes, and Venice; and Stockholm two nonstops to Dublin and Porto. Cardiff, Derry — a city Ryanair hasn’t served since 2020 — Exeter, and London Stansted will also see one new route each. The summer schedule begins at the end of March though some routes, like Stockholm-Porto, do not begin until June.
- On the China’s recovery, both KLM and Swiss will begin resuming flights in March. KLM will return to Beijing, and significantly boost service to Hong Kong and Shanghai Pudong from Amsterdam on March 26. Beijing and Shanghai will each operate six-times weekly and go daily in May, and Hong Kong will operate thrice weekly. Swiss returns to Shanghai with a weekly flight from Zurich on March 3, and increase to thrice weekly in April. China dropped its zero-Covid policy and removed most entry restrictions in January.
- Route tidbits: AirBaltic will add two routes for a total of eight at its Tampere, Finland, base this summer. Twice-weekly nonstops to Milan Malpensa and Nice begin in early May; the airline is not resuming flights to Frankfurt and Oslo. Southwest will add three new Long Beach routes: Colorado Springs and El Paso from July 11, and Albuquerque from September 5. The airline will also add seasonal Austin-Jacksonville and El Paso-Orlando from September 9.
Allegiant Air, please approach the stage to accept your trophy. No other U.S. airline had a better fourth quarter.
Indeed, among the 11 major U.S. airlines offering scheduled air service, Allegiant’s 16 percent operating margin (excluding special items) for the October-to-December quarter ranked highest, well ahead of Delta’s 12 percent. Nine of the 11 carriers in fact earned profits for the period. The two exceptions were Hawaiian and Southwest, for very clear, specific, and likely transitory reasons. Southwest suffered a now-notorious operational fiasco. And Hawaiian’s got a Japan problem, and to a lesser extent an inter-island one. Two airlines — American and United — even improved their margins from 2019. (See the By the Numbers section for a full ranking of the 11 airlines).
Most didn’t improve, and it’s no wonder why. One key theme that emerged from Q4 earnings calls is that airlines have much higher costs today than they did in the days before Covid. Let’s use Allegiant as an example. In the final quarter of 2019, it paid an average of $2.18 cents per gallon for fuel. Last quarter it paid $3.59 per gallon, a 65 percent increase. Labor costs are rising sharply as well amid a shortage of pilots and other aviation professionals. Pilots at Alaska Airlines, for example, ratified a new contract in October, granting wage increases of up to 23 percent. That — plus new labor deals with four other work groups — drove a 22 percent increase in the airline’s labor costs in the fourth quarter compared to 2019.
All U.S. airlines are undergoing a wage reset as they negotiate and sign expensive new contracts (only somewhat mitigated by having so many new employees, who are paid at the junior end of the pay scale). All airlines are likewise grappling with higher fuel costs. All are seeing inflation in other areas as well, from airport costs to aircraft maintenance. One way to ease these pressures, according to the unique characteristics of airline economics, is to spread these additional costs over more seats and more miles flown. Better to have that higher-paid pilot, for example, flying more revenue-producing passengers each day. Alas, this age-old tactic of depressing unit costs by growing available seat miles (ASMs) is running into major obstacles. Alaska, for its part, flew 10 percent fewer ASMs in the fourth quarter than it did in 2019. It’s not that the demand wasn’t there to grow. Alaska — and other U.S. airlines — couldn’t grow because of constraints like air traffic control congestion, aircraft delivery delays, long waits to perform engine maintenance (talk to Spirit about this), pilot shortages (especially at the regional level), airport worker shortages, training backlogs, increasingly disruptive weather, and so on.
United, in its fourth-quarter earnings call, said it’s now running with about 25 percent more spare aircraft than it did pre-pandemic. Aircraft utilization too (in other words, how many hours per day planes are flying), is down significantly. “Instead of pushing utilization to its theoretical limit, we are focused on protecting our reliable operation,” United Chief Financial Officer Gerry Laderman said. Earlier in 2022, as demand suddenly and sharply revived, most U.S. airlines tried to operate flight schedules that they ultimately couldn’t execute, leading to mass delays and cancellations last spring. The situation has improved industry-wide, Southwest’s winter woes notwithstanding, as carriers scaled back their flying. But you can see how this scaleback negates their hopes of using growth to alleviate the new cost burdens.
Sounds like an ominous turn of events, but another key theme of fourth quarter earnings season — a happy one for airlines — was at least as influential. Demand was downright spectacular, leading to record revenues. Some of that was merely less capacity leading to higher fares. But more generally, Americans — after being denied their vacations during Covid — want to fly. Allegiant, a domestic-only airline, called demand “extraordinarily robust.” United, talking about international demand, used the phrase “incredibly strong.” Corporate demand is still a good 20 percent short of full recovery, in volume terms. But forget about volume terms. In revenue terms, corporate travel has never been better.
In sum, revenue growth has been enough for most U.S. airlines to emerge from fourth quarter with a profit. In fact, of the 11 major airlines, all but four (JetBlue, Spirit, Frontier, and Hawaiian) managed profits for all of 2022.
The giant question now is can the current demand and revenue strength hold, and for how long? During most of 2022, and so far in 2023, travel has been perhaps the healthiest sector in the U.S. economy. That’s after being the most troubled sector in 2020 and 2021. Americans are currently spending their disposable income on beach vacations and dinner reservations, not home decorations and garage door installations. For that matter, they’re now paying less at gas stations. Maybe that’s a new norm. Maybe not. Maybe a recession looms. Maybe the economy holds solid, supported by a strong job market. Airlines, for sure, are hiring.
Amid this uncertainty, the industry will fight its cost war on several fronts, working to eventually restore normalized levels of aircraft utilization, while also adding new planes offering greater cost efficiency, like Boeing 737 Maxes and 787s, and Airbus A320neos and A220s. They’ll work on sustaining their revenue momentum as well, with new ancillary, merchandising, and distribution strategies. Lots of new alliances and partnerships are in development (a United-Air Canada joint venture, for one). Route networks, meanwhile, have changed a lot since 2019. American, for example, greatly downsized its footprint in Chicago, Los Angeles, and Philadelphia while adding capacity in fast-growing cities like Austin, Nashville, and — most importantly — its prized hub in the booming Dallas-Fort Worth metroplex. United and Delta, with more widebodies to work with, have aggressively expanded across the Atlantic to Europe, India, Africa, and the Middle East. Southwest and JetBlue have reduced their presence in Florida. Alaska has prioritized Seattle while shrinking in California. Southwest opened 18 new stations. And so on.
The current January-to-March quarter, remember, tends to be the weakest quarter of the year for U.S. airlines. But it’s typically the best quarter of the year for Florida and Caribbean routes. We’ll see who has the best margins for first quarter sometime in May. For now, enjoy your trophy, Allegiant!
By the Numbers
- Delta topped the charts for the full year with an 8 percent operating margin, excluding special items.
- The U.S. industry collectively made money in 2022, the first time since 2019.
Source: Airline Weekly analysis of company reports