The long weekend around Martin Luther King Day in the US used to be one of the bright spots in an otherwise slow travel quarter, with people using the extra day off to visit family, hit the ski slopes or escape the cold weather (and hopefully do some reflection on the legacy of the civil rights visionary while they were at it). This year, the vast majority of us — myself included — will instead be spending the Monday holiday where we have spent pretty much every day since March: at home. But the pandemic will end eventually and with vaccines now going into arms, people are starting to plan for a future when weekend getaways or even international sojourns are possible again.
Last year in mid-February, when the peak coronavirus havoc was still largely contained to China, one of my columns posed the question, “Would you board a cross-border flight today?” The piece pondered whether this new virus might be the thing that finally slowed the aerospace boom. It’s quite quaint in hindsight; little did I know what was coming. But if we were too optimistic then, perhaps we’re too pessimistic now about the post-pandemic travel rebound. “Everyone is far too focused on the next three months,” Melius Research analyst Carter Copeland said in an interview earlier this week. “I don't think anyone is bullish enough. I'm not bullish enough.”
Even after a furious end-of-year rally on vaccine optimism, US airline and aerospace stocks remain in a fairly deep rut relative to broader benchmarks, reflecting the unpredictable nature of the recovery and what is likely to be a herky-jerky start to the year as the industry tries to capitalize on the inoculation rollout. The International Air Transport Association estimates that global traffic — measured in revenue passenger kilometers — won’t return to pre-Covid levels until 2024. Shorter routes should recover faster than international ones, which means the overall airline passenger count could rebound sooner but likely not until 2023, the trade group said. Industry heavyweights from Boeing Co. to Raytheon Technologies Corp. have echoed that sentiment.
And yet, there are signs of pent-up demand. Try searching for flights for a summer travel destination; it’s neither as easy nor as cheap as you might think given the current state of malaise in the sector. Visits to Delta Air Lines Inc.’s website to check travel booking options were up 40% in the fourth quarter compared to the three months ended in September, executives said Thursday on a call to discuss the company’s most recent results. Customers aren’t yet converting that browsing into ticket purchases, but there’s clear interest in traveling again once it’s safe to do so. That’s giving Delta the confidence to stick to the forecast that it will stanch its cash burn by the second quarter of 2021 and begin making money again by the summer. Ambitious? Perhaps. Delta anticipates the first three months of this year will resemble the last quarter of 2020. It expects to burn as much as $15 million in cash a day on average, offer 55% fewer seats for sale than it did in the same period in 2019 and generate only about a third of the revenue it did in pre-pandemic times.
It will be interesting to hear United Airlines Holdings Inc.’s latest take on booking trends when the company reports its results next week. Chief Executive Officer Scott Kirby sounded one of the more optimistic notes in the industry last year when he predicted the third quarter of 2020 would mark the “turning point” in a travel recovery that would begin “in earnest” in 2022. The company said in December that current bookings indicated demand for summer travel would be down only about 40% from pre-pandemic levels, compared to a 70% slump for January.
The biggest question mark in the air-travel recovery guessing game is what happens to business demand, said Ron Epstein, an analyst at Bank of America Corp. “If you put 10 experts in a room, they’re probably all going to have a different view on how the recovery is going to play out,” he said. But Delta did offer some points of encouragement on business travel. In a survey of its corporate customers, 40% of respondents indicated they expected to be back to 2019 levels of business travel by next year, while 11% said they would be back by 2023. Only 7% of those surveyed indicated they would never return to pre-pandemic levels of corporate travel, while the remaining 42% said it was simply too early to tell. This is a Delta survey, so do with this what you will, but it does seem reasonable that not every corner of the corporate travel market can be replaced with Zoom calls. Many companies will be eager to get employees face-to-face with clients again in a post-pandemic world.
While Delta has said business travel could be 10% to 20% lower over a certain period of time, CEO Ed Bastian bristled at the suggestion that corporate demand was permanently impaired. “I don't think we should be worried or ringing alarm bells relative to the future of corporate travel,” he said on the earnings call. “All indications are that corporate travel is ready to start coming back and it will come back pretty aggressively beginning in the second-half of this year.”
If the recovery does ramp up more quickly than anticipated, it could very well catch investors — and companies — by surprise. It wasn’t that long ago that airlines were clamoring for ever more planes. The weak load factors — a measure of how full planes are — across the airline sector last year suggest there’s a decent amount of capacity floating around the system to absorb an uptick in demand, even after a wave of jet retirements and an aggressive effort to park unneeded jets. Delta is the only major US carrier that’s still leaving middle seats open to allow for social distancing, which gives it an easy way to add back space if needed. But bringing parked planes out of storage isn’t as simple as flipping a switch, creating the possibility of a pinch in capacity if the recovery turns out to be stronger than expected. That would be good news for airlines, which have had to offer lower prices as they compete for a smaller pool of leisure-travel customers. But travelers who wait too long to book their post-pandemic trips are going to get the other end of that deal.
And then there’s the risk of a tight labor market. While the airlines received a fresh round of payroll protection grants as part of the stimulus package passed by Congress late last year, they’ve cut tens of thousands of employees through voluntary retirement programs. Delta alone is down 18,000 people. Aerospace manufacturers Boeing, Raytheon, General Electric Co. and Honeywell International Inc. have targeted at least 70,000 job cuts between them. Several of those companies have signaled that the bulk of their respective cuts will be permanent as they learn to operate with a leaner cost structure, but there’s a good chance some miscalculated. “The industry has had its most violent downturn and dramatically cut costs to survive,” Copeland of Melius Research said. “I think the market will underestimate the scale of the upturn and that will bring a new set of challenges. Did we cut too much? Did we cut the wrong people or offer voluntary retirement to people essential to our ability to meet demand?” We’ll know soon enough.
Bloomberg
