Ben Goldstein, Lori Ranson Cost pressures could complicate airlines’ COVID recovery.
Ben Goldstein, Lori Ranson
The “Big Three” U.S. airlines expect their revenues to recover 70-80% in the fourth quarter. Credit: Joepriesaviation.net
Although some pressure from the delta variant of COVID-19 has lingered early into the fourth quarter, U.S. airlines expect its effects on demand are largely behind them, and they remain bullish for the rest of this year and into 2022.
Delta Air Lines is projecting that revenues in October will recover to 65% of 2019 levels, growing to 75% in November and December and pushing overall fourth-quarter revenues up to 70% of pre-pandemic levels.
United Airlines projects its fourth-quarter revenue will reach 70-75% of precrisis levels, and American Airlines expects to recover 80% of its 2019 revenues during the last three months of the year.
Those projections are being driven by strong holiday demand, a pickup in business travel and improving international trends following a decision by the U.S. government to lift restrictions on travelers from 33 countries starting Nov. 8. Airline executives discussed the current industry situation in a number of earnings calls.
Delta says its domestic business volume was close to 50% restored at the end of the third quarter. “We expect continued improvement as offices reopen at the start of the new year, and we anticipate meaningful acceleration in business travel starting at that point,” Delta CEO Ed Bastian said on the company’s latest earnings call.
Citing Delta’s most recent corporate survey, Bastian said more than 90% of respondents mentioned they expect travel volumes to remain steady or increase from the third to the fourth quarter. “Nearly 60% of our accounts are telling us they’ve already reopened their offices, with an additional 10% expected to open their offices by year-end,” he explained.
United concludes that its domestic business demand has rebounded to pre-delta variant levels or better, and “our largest accounts are now increasing at a similar rate to our smallest,” Chief Commercial Officer Andrew Nocella reports. He also notes that business traffic across the Atlantic was tracking consistent with “or slightly better than domestic business traffic.”
Since the U.S announced the easing of travel restrictions for arrivals from certain regions in September, United has seen a 35% increase in system bookings compared to 2019 from international point-of-sale agencies for travel in November and December.
American Airlines President Robert Isom points out that following the announcement, “overnight, we saw a 66% increase in bookings to the UK, 40% to core Europe and a 74% increase to Brazil.”
American expects its domestic leisure revenues in the fourth quarter will surpass 2019 levels “and continue that trend throughout 2022,” Isom says. “Recent trends show that corporate bookings month-to-date have improved significantly and are accelerating like they were earlier this year before the delta variant and associated restrictions were imposed.”
Despite the growing optimism among those airlines regarding the recovery prospects for the remainder of 2021 and early 2022, they also acknowledge that a certain level of uncertainty remains going forward.
“As we look ahead, it’s clear that the recovery will continue to be choppy,” says Bastian. “But we see a number of encouraging trends.”
One reason for the expected choppiness is rising cost pressures. Carriers are increasingly concerned about inflation, which has manifested in higher costs for fuel, labor, rent and landing fees.
Bastian says he expects the recent rise in fuel prices to lead to a “modest loss” in the fourth quarter. Management anticipates the average fuel price per gallon to be $2.25-2.40, representing an increase of nearly 40 cents from the third quarter. A 5-cent increase in fuel equates to roughly $40 million in additional expense, Bastian notes.
In light of the rising fuel prices, Bastian observes that balancing the restoration of capacity with demand will be key to keeping a lid on rising costs. He adds that management considers fuel a temporary headwind, noting that higher fuel costs historically track with rising revenue.
American CEO Doug Parker agrees, pointing out that carriers know how to be profitable even with high fuel prices: “2014 was a pretty good year in the airline business, and Brent [crude] averaged $100 a barrel.” He adds: “We’ll adapt if this is the new normal, but right now, in the very near term, it’s hard to adapt.”
Rising wages also present a headwind in the fourth quarter, with the challenge made worse by a general labor shortage in the U.S. and a faster-than-expected rebound of domestic capacity this summer.
Bastian says Delta has raised entry-level wages for new hires and increased pay for union contracts, and the airline is offering referral bonuses and premiums for workers to cover shifts. “We’ve never struggled to get people, and we’re still getting a lot of applications. We’re just getting a lot less than we have historically,” Bastian says.
Bob Jordan, Southwest’s executive vice president of corporate services, says staffing has proved a bigger challenge in 2021 than any other year in his long career at the company. “I’ve been at the airline for 33 years, and our constraints to growth have always been acquiring aircraft, airports facilities and gates,” Jordan says. “This is the first time where the constraint is staff.”
The shortage of labor, along with bad weather events, caught some carriers flat-footed in the third quarter, leading to operational meltdowns at Southwest and Spirit Airlines, with cascading delays causing knock-on network outages.
Over just four days in October, Southwest canceled more than 2,400 flights and delayed almost 5,000 others, which the company said cost it around $75 million. CEO Gary Kelly says the company was caught off-guard by leisure demand that “came sailing back,” with load factors higher than 90% on many days. The company has since increased its capacity cuts in the fourth quarter to help build more redundancies into the schedule.
“I think if we had to do it over, we could have been less optimistic about how quickly we could get folks back from leave and trained,” Kelly says. “So in terms of anticipating when they would be available, I think we were probably a little optimistic there.”
