U.S. Airlines Continue to Report Red-Hot Booking Strength. How Long Can It Last?
Pushing Back: Inside the Issue
They said it again: Demand remains exceedingly strong. Nearly all U.S. airlines presented to investors last week, sounding universally bullish about the upcoming spring and summer peaks. They talked about elevated yields. They talked about constricted supply. They talked about industry revenues as a percentage of GDP still far below trend. But they also talked—with less cheerfulness—about spiking labor costs.
Mostly unmentioned was another worry: Gathering storm clouds threatening the economy. Airlines across the world are watching closely as financial systems come under stress, evoking painful memories of 2008. There is however one silver lining to economic distress—oil prices dropped sharply last week.
Cheaper oil isn’t good news for Saudi Arabia. But the Kingdom’s oil riches from 2022 are more than sufficient to start a new airline. So that’s what it’s doing. Riyadh Air will join Jeddah-based Saudia in attempting to replicate the aviation miracle that Emirates achieved in Dubai. Both carriers, incidentally, gave Boeing some new business.
Latam’s business is going pretty well, post-bankruptcy. Business for Turkey’s Pegasus Airlines is going extremely well, post-pandemic. All Nippon has more details about Air Japan. WestJet and Sunwing look set to complete their merger. Airlines and lessors are getting more vocal about their delivery and engine frustrations. And don’t look now, but it’s almost April, which means the second quarter is in its final throes. The last big group yet to report Q2 earnings: China’s major airlines. Stay tuned for that.
Airline Weekly Lounge Podcast
U.S. airlines presented at a major investor event in New York last week. What did they say? Plus, a look at an airline in the Philippines with a very unique business model… and a very unique aircraft configuration. Listen to this week’s episode to find out. A full archive of the Lounge is here.
Weekly Skies
Latam, South America’s largest airline group, reported a solid if unspectacular 8 percent operating margin for the fourth quarter of 2022. The company, operating under bankruptcy protection from 2020 until last November, earned a 12 percent operating margin in the fourth quarter of 2019.
Bankruptcy allowed Latam to dramatically cut its expenses, excising about $4 billion in gross debt and about $1b in costs. Cash outlays for its fleet alone are down by some 40 percent. Good timing deserves some of the credit—Latam conducted much of its negotiation with lessors, bankers, and other creditors before industry conditions improved, adding to its leverage. Aircraft lessors, for example, were more likely to cut an airline-friendly deal in 2020 (when there were few other places to put planes) than in 2022 (when lessors had many more options amid reviving demand). Latam claims its non-fuel unit costs, adjusted for stage length, are now lower than those of even Panama’s Copa. In addition, it has no significant non-aircraft debt to repay for the next four years.
The picture is more mixed on the revenue side. Though it doesn’t disclose profits by country, Brazil is surely performing well for Latam, based on the even stronger Q4 margins reported by Gol and Azul. In addition, Latam has restored nearly all its pre-pandemic capacity in the Brazil market. Cargo, responsible for 15 percent of total Q4 revenues, remains solid, albeit with “softer pricing” of late. Opportunities beckon in Colombia, where Viva Air is no longer flying (Latam responded by moving another five planes into the Colombian market). Another strength is the airline’s Latam Pass loyalty plan, now with 42 million members—(Latam Pass “is very important for the… cash flow generation for the company”).
On the other hand, social unrest is making things tough in the Peruvian market, and intercontinental markets have in some cases taken longer to recover. Latam’s systemwide passenger capacity, measured by available seat kilometers, was still 16 percent below its Q4 2019 level.
Interestingly, during Latam’s earnings call, Citi analyst Stephen Trent asked if the airline might consider entering the Mexican domestic market, which like Brazil, has essentially become a three-airline market. He also asked if Latam would consider reentering Argentina, where it once had a subsidiary. “I’m not discussing anything either in Mexico,” said CEO Robert Alvo, “or in Argentina.” He instead replied that Latam’s immediate focus is on its five core domestic markets, namely Brazil, Chile, Colombia, Peru, and Ecuador. It also wants to grow more internationally, beyond where it was in 2019. Two newly announced international routes were Sao Paulo-Los Angeles and Bogota-Orlando, supported by its new joint venture partner Delta. Latam’s lower cost base, management asserts, will enable it to add new routes that might not have been economically viable in the past.
Delta retained a 10 percent ownership stake in Latam post-bankruptcy. Qatar Airways owns another 10 percent. The airline’s largest shareholder is a San Francisco-based investment firm called Sixth Street Partners.
Looking ahead, Latam sees “healthy levels of demand in most segments, the one major exception being Peru, including Peruvian domestic routes and international links from key markets like the U.S., Mexico, and Europe. The Peruvian situation has, however, seen some recent stabilization. Alva separately mentioned a “bottleneck” in visa issuance for Brazilians traveling to the U.S. “I would say that that is a market that has been significantly impacted in the last few months on the Brazilian point of sale.”
For all of 2023, Latam is forecasting an operating margin excluding special items of between 6 and 8 percent, a bit better than what it expected upon exiting bankruptcy last fall. Its debt, meanwhile, is expected to be at its lowest level in more than 10 years. Eventually, the company hopes to relist its shares in New York.
Turkey’s Pegasus Becomes World’s Most Profitable Airline in Q4
Turkish Airlines isn’t alone in using Istanbul as a platform for extraordinary profits. Its low-cost rival Pegasus Airlines recorded an unworldly 25 percent operating margin for the October-to-December quarter, which is typically an offpeak period. This makes Pegasus Q4’s most profitable airline in the world by this measure, edging out even Panama’s Copa. To be clear, the Turkish LCC is adding routes not just from Istanbul but also secondary Turkish markets including the capital Ankara and the popular beach destination Antalya. It ended 2022 with a fleet of 96 planes, which will increase to 102 by the end of this year. More than 80 percent will be Airbus Neos. As for capacity, it was already 14 percent larger in ASK terms than it was in 2019. Turkey, alas, has become an airline paradise, supported by favorable geography, lowish labor costs, and a boost from Russian travelers who might have once visited or connected in Europe. Not even Turkey’s extreme currency weakness is causing problems. For Pegasus, only 17 percent of its revenues are in lira. A full 39 percent is in dollars.
Saudi Arabia to launch a new airline
Riyadh Air, the new national airline announced this weekend, is the latest manifestation of Saudi Arabia’s hyper-ambitious attempt to develop its aviation and tourism sectors. The airline will launch using funds generated from Saudi Arabia’s lucrative oil industry, ironically to help boost an alternative economy within the Kingdom.
No details were provided about when the carrier plans to start flying.
The new airline aspires to link the country’s capital Riyadh to more than 100 destinations worldwide by the end of this decade. The carrier will join Saudia, another government-owned airline, in its case based in Jeddah.
The ambitious plans portend what will likely be a giant aircraft order, a separate announcement on which could come soon. Airbus and Boeing are both competing for the order. Saudia itself, including its low-cost arm Flyadeal, currently has 53 Airbus A320-family narrow-bodies on order, according to Cirium Fleets Analyzer.
Officials established a public investment fund, or PIF, tasked with helping the economy prepare for the world’s transition to cleaner forms of energy. Following a sharp run-up in oil prices last year, the Kingdom’s state-owned oil company generated an annual profit of $161 billion.
For context, that’s roughly equal to the total revenues of the Ford Motor Company and highlights the PIF’s financial capacity to undertake massive investments like a new airline with worldwide reach. The sovereign wealth fund is simultaneously investing in what promises to be one of the world’s largest airports. Announced in November, the King Salman International Airport is designed to accommodate up to 185 million passengers and process 3.5 million tons of cargo by 2050. Atlanta’s airport, currently the world’s busiest, handled about 110 million passengers in 2019.
During the oil boom of the 1970s, Gulf exporters typically deposited most of their export proceeds in western banks, earning interest but little in the way of national economic development. During the oil boom of the 2000s, however, some Gulf governments invested a sizeable share of their energy riches in aviation-related projects, including airlines, airplanes, and airports. Not all such projects turned out successful—Abu Dhabi’s Etihad proved overly ambitious. But others like Emirates and Qatar Airways proved more lasting, providing their economies with powerful engines of wealth and job creation unrelated to natural resources. Saudi Arabia was slow to adopt this model, mostly because it was reluctant to spawn a large tourist sector.
That’s completely changed. The Kingdom is now aggressively encouraging tourism, cutting airport charges and inviting foreign low-fare carriers like Wizz Air to serve its markets. The country, as Skift recently reported, plans to spend a massive $1 trillion over a decade to develop its tourist economy. It aims to welcome some 100 million visitors annually by 2030.
Will its aviation ambitions succeed? That will partly depend on the success of its tourism efforts, in the past challenged by practices including prohibitions an alcohol, restrictions on female freedoms, and highly publicized allegations of human rights abuses against journalists.
The new Riyadh Air will be run by Tony Douglas, formerly the chief of Etihad. “The airline,” said the PIF in a statement, “will provide tourists from around the world the opportunity to visit Saudi Arabia’s cultural and natural attractions.”
Aegean Airlines Post Third Straight Profitable Quarter
Greece’s Aegean Airlines, riding a strong wave of inbound tourism, reported its third straight profitable quarter this week. For the three months ending in December, Aegean earned a 2 percent operating margin, a full point better than what it earned in the same quarter of 2019.
Greece is a highly seasonal airline market, and one typically defined by very strong profits in the summer but losses during the winter. Any fourth quarter profit is thus considered a victory. In Aegean’s case, its Q4 strength follows an extremely strong summer quarter, in which operating margin reached 29 percent, one of the highest figures for any airline worldwide. Only Ryanair and Turkey’s Pegasus did better that quarter.
In Athens, Greece’s busiest airline market and Aegean’s largest base of operations, fourth quarter airport volumes were still 2 percent off their 2019 levels. But the story was different at airports serving major Greek island resorts. Rhodes, the busiest of the island airports, saw fourth quarter traffic rise 14 percent above 2019 levels., according to the airport’s operator Fraport. Crete, Corfu, and Santorini airports saw double-digit gains as well. Data from Eurocontrol, which handles Europe’s air navigation, likewise show Greek flight activity well above 2019 levels. Aegean itself, however, scheduled about 3 percent fewer seats in fourth quarter 2022 than in fourth quarter 2019, according to Diio by Cirium data. The decrease in part reflects its exit from the Russian and Ukrainian markets.
The airline now says cheerfully that “the first indications for 2023 are particularly encouraging,” highlighting strong international bookings for the upcoming summer peak. The airline champions what it calls an “extrovert” strategy, targeting tourists based outside of Greece. During the pandemic, it was forced to rely more on domestic Greek travelers. But trends are reverting to pre-pandemic norms, in which roughly three-quarters of Aegean’s passengers were flying internationally.
The Greek market is competitive, with Sky Express a home-grown carrier that’s now expanding. The country’s busiest foreign carrier is Ryanair, which helpfully for Aegean shrank seat capacity 17 percent last quarter, relative to 2019. But other low-fare carriers like easyJet, Wizz Air, Jet2, and Lufthansa’s Eurowings grew their Greek presence. As a result, overall seat capacity from Greek airports grew about 5 percent from three years earlier.
A central plank in Aegean’s current business plan involves re-fleeting with Airbus Neos. As of December, it was expecting nine more to arrive this year, though delivery delays create uncertainty. The hope is to have 26 in service this summer, alongside 32 prior-generation Airbus narrowbodies. The longterm plan is to have 46 Neos in service by the end of 2026. It also operates ATR turboprops for routes with less demand. Management says the Neos offer lower operating costs, a better service product, more business class seats, and greater range. The latter benefit is not insignificant, given Greece’s favorable geography. Longer-distance A320s put Athens as well as the Greek islands within range of more cities in the Middle East, most notably. Aegean currently flies to Amman, Beirut, Jeddah, Riyadh, and Tel Aviv, offering connections to Europe via Athens.
The airline is separately investing in a new maintenance and training center, as first announced in December. It also wants to buy back all the ownership rights claimed by Greece’s government, which acquired them in exchange for pandemic-era financial assistance. As for loans it received from Greek banks during the crisis, Aegean this week repaid them in full, three years before their maturity.
In a release disclosing the fourth quarter financial results, management trumpeted its environmental achievements, noting a 9 percent reduction in CO2 emissions last year, versus 2019.
The big challenge in 2023, as always for Aegean, is making sure it earns hearty spring and summer profits, to protect against the likelihood of wintertime losses. Based on current schedules, its second quarter seats will be up 3 percent from second quarter, 2019.
Canadian Consolidaiton
WestJet, on March 10, reacted favorably to Canada’s decision to approve its merger with Sunwing, a tour operator that includes an airline. “We are pleased that the regulatory review of the transaction is now complete,” said Angela Avery, WestJet Group Executive Vice-President and Chief People, Corporate & Sustainability Officer. But the ruling did come with conditions, including some pertaining to capacity. Still, the newly-enlarged WestJet, upon finalizing the transaction, will have more muscle to compete against rivals like Air Canada, Air Transat, and Porter Airlines.
Japan’s All Nippon Airways unveiled key product details about its new low-cost unit Air Japan. The carrier’s planes will feature a 324-seat all-economy configuration, launching next February to points within Asia. Rival Japan Airlines has its own low-fare widebody unit called Zip Air.
Fleet
- Boeing won a bonanza of new orders from Saudi Arabia, including one by the newly-announced startup Riyadh Air. It will buy as many as 72 787-9s, 39 of them firm orders. So not to feel left out, the country’s incumbent state-owned airline, Saudia, ordered up to 49 Dreamliners, opting for both the -9 and -10 versions; 39 of these orders are firm. Boeing is winning lots of new orders lately, including one of the biggest deals ever from Air India this year. It won a big order from United as well. The bigger problem seems to be building the planes. 787 deliveries are way behind schedule, owing to supply chain problems and lengthy production pauses.
Aircraft Lessors Speak in New York
- AerCap, the world’s largest lessor, told investors at last week’s JPMorgan event that the global aviation industry is only about 80 percent recovered to its 2019 level of traffic. Much of the deficit lies with Asia, most importantly the Chinese international market. As it discussed during its Q4 earnings call, AerCap sees demand recovery quickly getting back to pre-crisis levels. But aircraft production is not recovering nearly as fast. “We would think that the supply/demand imbalance will continue to persist for at least the next couple of years.” This naturally means higher aircraft lease rates.
- AerCap’s rival Air Lease Corp. (ALC), also speaking at the JPMorgan event, aired its frustrations about the latest generation of aircraft engines powering planes like the Boeing MAX and the Airbus Neo. These engines, it explained, were designed and developed roughly 12-to-15 years ago, with the goal of reducing fuel burn by about 15 percent, while also lowering noise and carbon emissions. “But to achieve that,” said CEO Steven Udvar-Hazy, “all of the manufacturers—GE, Rolls-Royce, Pratt & Whitney, CFM—pushed technology to the outer end of the envelope… And so consequently, what we have today [are] engines that are delivering a 15% average reduction in fuel burn per seat, but the maintenance cost of these engines is far higher than what was originally projected.” They’re in fact spending less time in the air and more time in the shop, relative to their predecessor engines. Separately, ALC described the current strength of the narrowbody market, noting that 737-MAXs are leasing for rates some 30 percent above where they were 18 months ago. Widebody demand, too, is increasing sharply, especially amid tight supply. “I think the widebody recovery has been quicker than we anticipated, and narrowbodies are strong to begin with.” Hazy described airlines as an essential service throughout the world—“We’re not going to go back to taking the Queen Mary from New York to London. You’re not going to take Wells Fargo’s stage coach if you have to go out to the West Coast. We’re going to continue to fly… I don’t think there’s an alternative to get to places in the world.”
Landing Strip
- The operators of Frankfurt and Zurich airports, both major Lufthansa hubs, reported earnings last week. For Frankfurt, owned by Fraport, this summer’s shorthaul seat capacity will still be down about 20 percent from where it was in the summer of 2019. Intercontinental capacity, however, will be down more like 10 percent. A critical objective for the airport this summer is avoiding a repeat of last summer’s operational headaches. Longer-term, a key project is the opening of a new third terminal, currently scheduled for 2026. Fraport is separately opening a new runway at Lima’s airport in Peru next quarter; Lima will get a new terminal within the next two years as well. Another Fraport project is a new terminal at Antalya airport in Turkey, slated for 2025.
- As for Zurich airport, management doesn’t expect a full traffic recovery until 2025. During its earnings call, it downplayed the airport’s dearth of low-cost carrier activity, attributing that in part to a lack of free capacity during peak times. “We have also to make sure that the hub carrier can function in the peak. So we will never be a very attractive place for LCCs since we don’t have the capacity.” Outside of the peaks, however, it said Zurich is attractive for LCCs thanks to reasonable fees and a strong local economy.
The Latest on Delhi’s New Airport
- Zurich airport is also behind the new airport under development for India’s capital Delhi. It will primarily handle domestic traffic when it opens next year. But over time, international routes could follow. Zurich airport executives say the new Noida airport will be like London Gatwick. “In Gatwick you would also have international routes, but maybe not as many as in Heathrow… we are kind of the Gatwick of the Delhi region.”
State of the Unions
American Airlines pilots say they are mystified that CEO Robert Isom publicly promised a Delta-level contract when the carrier had not made such a proposal to union negotiators. But with negotiations ongoing, the airline indicated a proposal is close.
“We look forward to reaching an agreement with APA (Allied Pilots Association) quickly so that American’s pilots can benefit from meaningful enhancements to their pay and quality of life,” American spokesman Gordon Johndroe said late Monday. “We believe a deal is within reach and can be negotiated expeditiously.” The two sides are negotiating this week.
In a message to members entitled “Offer, What Offer?” on Sunday night, officials of the Allied Pilots Association expressed concern that on Tuesday, Isom released a video saying American would match the Delta offer. Then on Sunday, APA said, “management took the unprecedented step of communicating directly with Congressional offices and others in Washington, D.C. regarding the content of the video.”
“To be clear, Robert Isom’s negotiating team has not made any offer to APA’s negotiating team containing pay, benefits, or the ‘significant improvements to scheduling-related and quality-of-life items’ referenced in his direct message to the pilots on Tuesday,” APA said Sunday.
“Offers are made at the bargaining table, not through videos to the membership or letters to Congress,” the union said.
APA spokesman Dennis Tajer said the union was surprised that Isom seemed to bypass its negotiators.
“Is this a nefarious attempt to bypass the union, or are they so disorganized that they forgot to pass us anything at the table?” Tajer said. “Going to Capitol Hill with an offer is unprecedented.
Johndroe declined to specify why American said publicly that it would match Delta before it said so in negotiations. However, it is likely American felt a need to address lingering concerns that it might not match Delta, even before it made a specific offer.
In American’s pilot contract talks, last week was a busy one for the two sides. It appeared that talks were on a fast track.
The tenor of pilot contract was altered on March 2, when Delta pilots signed a contract promising 34 percent raises and quality of life improvements. United and Southwest pilots are also engaged in contract talks.
Isom made his public offer on Tuesday March 7 in a video and a letter, when he said, “Let’s be clear. American is prepared to match Delta pay raises and provide American’s pilots with the same profit-sharing formula as Delta’s pilots.
“I want to ensure there is no question of our intent – that is, we want you to be paid as well as your peers. We want you to have the quality of life and benefits that matter most to you. And we don’t want you to have to wait.” Isom said
He said the total pay increase for American pilots would average 40 percent in the fourth year of the deal, which would cost the carrier $7 billion over the four-year period.
In response, APA committed to fast-pace negotiations. In a message to pilots, APA President Ed Sicher said, “Your negotiating committee and the company’s negotiating team have agreed to a disciplined and uninterrupted process through March to get a deal. That way, “come April 1st, we won’t be April Fools.”
On Thursday March 9, APA said it approved a strike authorization vote, scheduled to conclude April 30. “APA remains committed to reach an agreement with American Airlines management in the near term, but every APA pilot understands actions speak louder than words and we must prepare for any eventuality,” the union said in a prepared statement. Tajer said the scheduled vote was largely an effort to show that the union like the carrier is committed to a rapid conclusion of negotiations.
“We’ve been on record: we are encouraged by what Robert Isom is saying, by his commitment that quality of life issues are addressed,” Tajer said. “But now we’re concerned that there is a disconnect between the energy expended with the media and on Capitol Hill and the energy expended at the negotiating table.”
Feature Story
It’s like that bunny in the old Energizer battery commercials: Still going.
Roughly one year ago, Covid’s cork on travel demand finally popped off, unleashing some of the strongest bookings for air travel that U.S. airlines have ever seen. Well, that demand is still going strong, according to a parade of U.S. airlines that presented at a J.P. Morgan investor event in New York last week. Here’s Ed Bastian: “I can tell you at Delta, our demand is strong and getting stronger.” American’s Robert Isom: “From a demand perspective, I can tell you that what I see coming to the summer, it looks really positive.” Southwest’s Robert Jordan: “I’m just really pleased with our first quarter revenue outlook.” Spirit’s Ted Christie: “Our unit revenue production is very much on track. Demand has been strong heading into the peak part of the spring break leisure period and being a Florida-based carrier where a lot of our capacity is, it’s going to be a very good spring break for us.” You get the point.
On Monday, one day before the investor event, United introduced some unease by disclosing weaker-than-expected revenue trends for the current quarter, putting it on track for a quarterly loss. Presenting at the JPMorgan event the next day, however, CEO Scott Kirby—while apologizing for the bad Q1 forecast—dismissed its significance. January and February, as it turned out, came in weaker for United. Why? As Kirby and his colleague Andrew Nocella explained, these are offpeak months that historically saw a fair amount of corporate travel to prop up yields. Well, corporate travel hasn’t yet returned to 2019 levels. Nocella, meanwhile, perhaps more importantly, hinted that the airline might have pushed too far on yield management, taking fares up too high.
Ignore all that, United is saying. “Putting aside where we are in Q1,” Nocella assured, “the financials and the outlook are really great. We’re on target for everything we said we’d be on target for the year.” Kirby added, “We had a bad forecast, and we own it… [but] the bigger picture is the outlook looks really strong.” Sure enough, United is sticking to its full-year forecast of earning a 9 percent pre-tax margin excluding special items. That happens to be exactly what it earned in 2019.
United’s disclosure to investors, however, also mentioned what seems to be a more threatening headwind, one sweeping across the entire U.S. airline sector. The Chicago-based airline said costs are coming in higher than planned. Its Q1 non-fuel unit costs, specifically, will be flat or up slightly versus last year, it now says. In January it forecasted a 3-to-4 percent decline. To be clear, this merely reflects a decision to account for costs associated with a pilot contract that doesn’t yet exist but will at some point probably soon. But quarterly accounting practices aside, the underlying fact here is that pilot costs are about to spike. And they’re spiking industry-wide. Delta’s pilots say their new contract will cost the airline some $7 billion over four years. American, still in negotiations (like United and Southwest) is offering a contract that it says would eventually pay widebody captains close to $600,000 a year.
Only the heavens know what lies ahead for fuel prices. But as 2023 progresses, a central question is emerging: Can U.S. airlines maintain enough revenue strength to offset spiking labor costs? Throughout most of 2022, they showed that yes indeed, revenue strength was sufficient to overcome all sorts of cost headaches, from fuel shocks to operational mayhem to higher airport and interest costs to poor asset utilization. So far this year, fuel has been more friend than foe, albeit with some variance by region. Asset utilization, staffing, and operational integrity have improved as well. Newly arriving aircraft, however behind schedule, are likewise helping to alleviate unit cost pressures. But make no mistake, these new union contracts are adding a lot to the industry’s cost base.
The pessimistic view? That demand will not maintain its momentum, instead buckling under the weight of a softening economy and pinched household finances. The recent distress in the banking sector certainly doesn’t allay those fears. Despite what’s still a healthy job market and lower energy prices, Americans are now spending less on almost everything, from goods to services like dining out. Travel is a rare exception of a demand category still going super-strong. Can this really last? As Prince might say, airlines are partying like its 1999, a year in which fuel prices were low, the economy was booming, and U.S. carriers were awash in profits—even ones with extreme cost bloat like US Air. All signed expensive new labor contracts. Lo and behold, the dot.com recession would follow in 2000, sinking the industry’s fortunes a good year before the scourge of 9/11. Revenues can vanish quickly. Costs are much stickier.
Stop the fearmongering, say the optimists. It’s not 1999. It’s 2023. Yes, the industry’s cost base is rising sharply, the cheerleaders admit–but for a reason that will actually lead to more revenues. United’s Kirby, the unofficial spokesperson for this theory, explains that costs are rising due to longterm structural impediments to capacity growth—labor shortages, aircraft shortages, airport facility shortages, air traffic control capacity shortages, etc. And as Econ 101 teaches, constricted supply leads to higher prices. Besides, the optimists argue, airline revenue as a percentage of U.S. GDP is way below its historic norm, implying lots of revenue that has yet to re-materialize post crisis (of course, demand might be running below normal because there’s not enough capacity to handle it all, or because demand is getting priced out by excessively high fares).
The optimists, furthermore, point to corporate traffic that’s not yet fully back. China’s opening could add fuel to the demand fire as well. On the cost side, airlines still have underutilized planes, people, and airport property. And don’t overlook all the steps airlines themselves are taking to make their businesses stronger:
- American is concentrating more flying at its most profitable hubs, namely Dallas-Fort Worth and Charlotte. It’s shoring up its coastal flanks by cooperating closely with JetBlue and Alaska. Debt repayment is a top priority, admitting it’s a concern. Fortunately, upcoming capital expenditure needs are modest thanks to a young fleet, implying healthy future cash flows. American cut a lot of costs during the pandemic. Its sunbelt-heavy network is overweighted to fast-growing metros. Its Latin network is second to none. It’s strong in giant overseas markets like London and Tokyo. It has limited exposure to Asia overall. Like most of its U.S. peers, American says its loyalty program is performing exceptionally well.
- United points out that as international demand continues its recovery, domestic routes stand to benefit since so many customers on domestic flights are connecting to and from international flights. Asia, it says, is all but fully recovered excluding China. Deep South America is the only other notable area of international softness. It adds that international flying overall—buttressed by cargo activity and strong joint ventures (including a new transborder one with Air Canada)—produces higher profit margins than domestic. International should get even stronger as more domestic capacity is restored, facilitating more overseas connecting options. United is most aggressive among its peers in ordering new planes, opting for large-gauge narrowbodies in part to replace the roughly 300 regional jets no longer flying.
- Delta took a bit of a dig at United and its guidance miss, saying its own “forecasts and guidance [are] right in line, if not slightly better than we were thinking.” (Ouch.) CEO Ed Bastian explained that the airline just enjoyed its 10 highest sales days in company history. “So if anyone is looking for weakness, don’t look at Delta.” Some of the current demand, it acknowledged, is carry-over from trips unable to happen a year ago, even after Covid receded, because so many springtime flights were canceled due to weather or operational issues. Bastian talked in some detail about Delta’s ambitious plans for free inflight Wi-Fi, working with companies like T-Mobile and Paramount, both eager to access the airline’s “captive audience” of some 200 million passengers a year. He refers to the inflight Wi-fi opportunity as a potential “gold mine.” Delta of course has its lucrative SkyMiles loyalty program, its prized relationship with American Express, its treasured hub in Atlanta, and a collection of joint ventures with international partners like Air France/KLM, Virgin Atlantic, Latam, Aeromexico, and Korean Air, all of whom cut costs dramatically, in some cases via bankruptcy. One challenge though, is that roughly a quarter of Delta’s employees are new to the job, which implies some inexperience, which in turn implies lower productivity and perhaps even some degradation of customer service.
- Southwest said it’s pleased with first-quarter revenue trends, with yields and loyalty point redemptions remaining strong. Last quarter, remember, an epic operational meltdown dragged it to an uncharacteristic loss. The incident continues to reverberate into Q1, which should see a revenue hit between $300 million and $350 million. That’s related to people avoiding Southwest and instead booking on rival carriers during January and February, though the practice seems to have ended in March. Managed business revenues, a proxy for corporate travel, are now largely back to where they were pre-crisis, “a big and significant milestone.” It also said booking curves (referring to how long before departure people book their flights) are back to pre-crisis patterns. This for one means that leisure travelers are no longer booking so close to departure as they were throughout much of 2022. Operations have stabilized. It insists it can better handle disruptions now. And it has no plans to change its core business model. Southwest will, however, lose money again in Q1, not surprisingly given that $300 million-plus revenue hit, not to mention Q1 being offpeak for most of its network. One other point to make, though it didn’t come up at the JPMorgan event: Southwest has lots of exposure to the California market, whose giant tech sector is contracting.
- Alaska is even more exposed to the reeling tech sector but insists that giants like Microsoft and Amazon still have plenty of money to travel. And besides, such companies are being extraordinarily generous with layoff severances, supporting spending power. In any case, the company made no changes to its original Q1 revenue forecast, noting lower load factors but strong yields. Bad winter weather in the west was unforeseen. Ditto for elevated jet fuel refining spreads. But longer term, Alaska sees opportunities like the potential to generate more connecting traffic through Portland. A partnership with American is helpful, as is oneworld membership. CFO Shane Tackett does have at least one regret though: “I think if we had a do-over, we would have tried to get more of our version of First Class into aircraft… That’s the one thing we probably would like to do over is just have a higher number of seats in the First Class or premium economy cabin.” Fortunately, it will have an opportunity to add more as new Boeing MAXs arrive.
- JetBlue finally has something positive to say about the weather in the northeast—a rare absence of snow this winter has greatly benefitted operations (and means more flown ASM capacity than forecasted). The benign weather hasn’t stopped northeasterners from flying to Florida and the Caribbean, however. CEO Robin Hayes said both markets are performing well. The big topic at JetBlue, of course, is its pending merger with Spirit, now subject to hostilities from both the Departments of Justice and Transportation (the DOT hasn’t yet weighed in but said it would). JetBlue faces Washington pushback on its alliance with American as well. Hayes defended both transactions as pro-consumer, adding that the American partnership has greatly amplified its strength in Boston while also adding lots of value to its loyalty plan. Another big strategic push for JetBlue is its European expansion, held back by Airbus delivery delays. In a regulatory filing last week, JetBlue said it “continues to experience robust travel demand trends, which strengthened into Presidents’ Day weekend and beyond. The Company is seeing very strong demand in our core leisure and visiting friends and relatives (VFR) markets.” On the other hand, it faces elevated jet fuel prices due to refinery issues in the northeast.
- Spirit itself defended the JetBlue merger, which it once fought hard to prevent. It too by the way faces higher than expected fuel costs, now forecasting an average of about $3.50 a gallon for the quarter, up from its previous guess of $3.20. Its new pilot deal also adds to expenses. Most frustrating are engine-related delays on Airbus Neos. But like the rest of the industry, Spirit is exceedingly pleased with demand trends, including during the all-important Florida peak now underway. The airline likes its position at capacity-constrained airports, including New York LaGuardia and Newark. Its critical ancillary revenues are strong. It’s pricing better too, including what it charges for its Big Front Seats. CEO Ted Christie did say that more traditional seasonal patterns are returning, and that costs remain the company’s number one focus after safety.
- Frontier, which tried to merge with Spirit before a higher-paying JetBlue spoiled its plans, insists that its cost advantage versus the industry is widening. Bookings look great. It feels lucky to have a large order book of hard-to-get Airbus Neos. But it does say Airbus delivery delays have left it with a surplus of pilots that hurts productivity. The pilot shortage, however, seems to be easing, it says, citing milder pressures at SkyWest—“they’re kind of the canary in the coal mine.” Frontier, by the way, thinks it will benefit from the JetBlue-Spirit merger.
- Sun Country echoed what everyone else told investors in New York last week: Demand looks great. It said pilot attrition is down. It’s gaining share in Minneapolis, though not at Delta’s expense. And it sees lots of additional opportunities to grow. Sun Country has a unique business model that includes a lot of cargo and charter flying.
- Though primarily a U.S.-focused conference, Air Canada presented as well and—you guessed it—spoke of strong demand. Transatlantic is especially strong. Premium demand and Air Canada Vacations demand too. Overall, demand is growing faster than capacity. It also said its new transborder joint venture with United is “surpassing expectations.” International flying, it added, has long been higher-margin than domestic for Air Canada.
By the Numbers
Note the variance in Q4 jet fuel prices paid by different airlines, a topic that came up a few times during the JPMorgan investor event last week. Some carriers like JetBlue are more exposed to the current elevation in New York Harbor pricing, linked to shortages of refinery capacity. Delta on the other hand, which controls its own northeastern refinery (in Philadelphia), paid less than anyone else for fuel last quarter. Southwest, for its part, is benefitting from active hedging.
Source: company reports