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Covid Risks? Airfare Inflation? Let’s Hit the Skies

Covid Risks? Airfare Inflation? Let’s Hit the Skies

Thursday, 20 October, 2022 - 04:45

During the height of the pandemic, airline executives knew travel would recover eventually when vaccines were widely available. They also had a vague notion that flying patterns would change. They were right on both counts. Demand is closing in on 2019 levels, and executives are getting a clearer picture of how the pandemic modified passenger behavior. Those changes and pent-up appetite for travel will continue to benefit airlines despite continued Covid risks and capacity constraints that will keep airfares elevated for some time.


One of the biggest drivers of the new flying patterns is the ability to work either remotely or from the office. Business and leisure travel are being combined in a new trend that airlines call hybrid work. Customers are extending their business trips to add on a few days of sightseeing. They also have the flexibility to travel more often and to vary their schedules; they can fly during the week and work a couple of days from an Airbnb while the family hits the beach or the slopes.


As a result, United Airlines Holding Inc., which reported third-quarter results late Tuesday, had the third-highest revenue per available seat mile in its history in September, which is normally an off-peak month. Delta Air Lines Inc. is experiencing more demand during the week and seeing less of the typical spikes of departures on Sunday and Monday and return trips on Friday.


“What we’ve seen is demand has come back very different in 2022 than it left in 2019,” Delta President Glen Hauenstein said during a conference call with analysts last week.


Domestic flying was the first segment to rebound, and that continues to be strong. Travel to Europe is now leading the recovery of international travel, and Asia is picking up as countries such as Japan begin to reopen. United said on Tuesday that it had restarted flights from the US to Tokyo and to Edinburgh, Scotland, for example, and added a new one to Cape Town, South Africa. China is still a big holdout with its zero-Covid policy, and it’s impossible to forecast when that will change.


The trend line is clear: People are returning to the skies. During the height of the pandemic, when airports were ghost towns, some were predicting that travel would never return to normal and workers would just settle for Zoom meetings. It was hard to conceive in 2020 that people would crowd together again to travel by air.


Both business travelers and tourists are now willing to climb into a small metal tube packed with a few hundred maskless strangers. Covid-19 has by no means vanished. There are still about 37,000 new cases a day in the US and 321 daily deaths over a seven-day moving average, according to the Centers for Disease Control and Prevention. That’s down considerably from a peak of 812,000 daily cases in January and daily deaths as high as 2,700 in February. People are more confident that if they are healthy and vaccinated, Covid is more like the flu than a death sentence.


For those passengers willing to take the risk, they will continue to pay up for the privilege to fly. US ticket prices jumped 22% in the second quarter from the period a year earlier, according to the latest data available from the Bureau of Transportation Statistics. This is a function of the inability of aircraft manufacturers to keep up with demand, a dearth of pilots, and even constraints at air-traffic control centers and some busy airports. Airlines can’t add all the capacity they want, and that means prices will rise. United said its capacity in the fourth quarter would be about 10% below the same period in 2019. Delta’s capacity is still 17 percentage points behind the 2019 level; it expects its network to be fully restored by next summer.


This isn’t a short-term problem. It could take four or five years to work through the issues crimping capacity, Scott Kirby, the chief executive officer of United, said during a Bloomberg TV interview on Wednesday. This is why revenue and profits will rise for airlines even as the economy slows and inflation eats away at consumer buying power.


“Supply is going to be constrained for years to come by artificial factors,” Kirby said. “Boeing and Airbus are way behind, and the supply chains are way behind, on their ability to produce new airplanes.”


This is great for airline profits, not so much for passengers. United’s planes were 87.3% full in the third quarter, up from 76.1% last year and topping the same period in 2019, which was 86.1%. Having full planes translates into higher earnings, and United forecast that its fourth-quarter adjusted operating margins would beat 2019’s for the first time.


Not all airlines are happy with the shortage of planes. Michael O’Leary, CEO of low-cost carrier Ryanair Holdings Plc, said the “only dark cloud on our horizon” is Boeing’s inability to deliver the 21 737 Max aircraft the Irish airline is supposed to receive before Christmas. O’Leary expects to get maybe a dozen of those new planes. With more capacity, Ryanair would be able to take market share in an environment of rising ticket prices.


Airlines expect to be fully recovered next year as corporate travel, the last holdout, returns to normal. Covid cases and even deaths will likely never go to zero, but the risk is on the decline, and people are learning to live it. After all, thousands die each year from flu strains that have been around for a century or more. Packed airplanes, restaurants, concerts and sports stadiums point to people resuming their lives.


The big question is whether the combination of business and leisure trips is a long-term trend and whether remote work will last, providing people with those flexible travel schedules that airlines are loving. For now, airlines are betting this new work-life balance is here to stay.


Bloomberg


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