January 29, 2023


Business leisure

A Nice Little Spring Break Bump Will Help U.S. Airlines, But It’s Not A Sign Of A Real Recovery

The dark side of social media is that, within seconds, anything can be blown out of proportion and taken out of context. And it’s very difficult not to get swept up in it all.

– Nicola Formichetti

Formichetti, a Japanese-Italian fashion designer known for dressing Lady Gaga, was talking about the penchant of many folks today to get carried away by the tiniest or most insignificant details of some Tweet, Insta post or TikTok comment.

But he just as well could have been talking about investors’ response this week to the tiniest and mostly insignificant news reports that U.S. airlines may finally have begun to see some rebound in travel demand.

On Monday United Airlines’ shares jumped 9{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} after the carrier said that this month likely will be its first “cash positive” month since the Covid-19 pandemic sent the industry into near collapse in February 2020. Shares of the other big U.S. carriers – American, Delta, Southwest, Alaska and more – saw similar big jumps, too, as some investors took that revelation, made by United in a government filing, as a signal that the airline industry is shifting back into one of its big boom phases. The Dow Jones U.S. Airlines Index rose more than 4{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} on Monday.

The problem, however, is that many of those investors who jumped on the airlines-are-back bandwagon this week didn’t bother to understand the caveats that United placed around its good-sounding news. It will still report a huge first-quarter cash burn rate (in addition to yet another very large quarterly loss). And though United’s first-quarter burn rate is likely to be smaller than the $19 million a day it burned through on average in the fourth quarter, but it’ll still be large.

And the increase in leisure travel demand that United and all of its U.S. competitors are seeing this month won’t be nearly enough to offset surprisingly weak demand they experienced in January, and which extended through the first half of February.

Additionally, United, like its rivals, has made it clear that demand has picked up in the last four weeks almost entirely because leisure travelers seem to be itching to fly and go places after a year of cloistering from the pandemic. Unfortunately for the carriers and their investors, serving leisure travelers is an extraordinarily bad business for most airlines because leisure fares are so low that airlines can go broke quickly – and historically many have done so – by flying lots of planes loaded to the gills by low fare-paying leisure travelers. If the average fare price paid per passenger mile flown is below the average cost of flying one passenger one mile, that difference simply cannot be made up by flying more passengers at below cost prices.

Thus, without higher fare-paying business travelers, all conventional airlines — and even many so-called “low cost carriers” — simply can’t make a go of it. Typically they need business travelers just to cover their huge operating costs. To earn profits they nowadays have to depend upon revenue from important side businesses like the sale of their frequent flier points to third parties — banks and credit card companies, mostly, that use those mileage points as trading stamp-like rewards they give to their own customers.

And one more thing; United cleverly got some unearned news coverage mileage simply by the way it phrased its cash burn disclosure on Monday. It said its “core cash burn” will end this month, and that its “core” operations will be cash positive.

Now, there’s a subtle but important difference between that and saying that in March it will be “cash flow positive” in an absolute sense. The term “core cash burn” does not have a standard definition. But in United’s use of it the term means that it expects to be “cash flow positive” this month, but only if you exclude its debt payments and any severance payments it makes.

That’s about like saying that your salary covers all your living costs – except your rent or mortgage payment and your car payment.

As of March 1, United had a staggering $26.20 billion in long term-term debut plus another $2.09 billion in debt due this year. Even after adjusting for its $11.27 billion in cash and cash equivalents (including several billion in cash granted and loaned to it by the U.S. government) United has $17.02 billion in so-called net debt. For a company that brought in only $43.3 billion in 2019, the last year of “normal” operations, and just $15.4 billion last year, $28.3 billion in total debt is a near-crippling amount.

To be sure, we’re not just picking on United here. Replace “United” with the names of other big U.S. airlines and financial picture would look more or less the same. Southwest’s picture probably would be the least bad; after all it has managed to retain its investment grade debt rating. And the picture at, say, American, which has an even larger debt load, would be marginally worse.

But make no mistake about it, despite the current – and hopefully continuing – uptick in leisure travel demand – U.S. airlines are still a litter of very sick puppies.

They collectively lost $35 billion last year; added $67 billion in new debt in 2020 to push their total debt by year’s end to $172 billion; and saw their combined 2020 revenues tumble by more than 60{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} from 2019.

Thus, this spring break-influenced uptick in leisure demand, while much-needed, is of only modest significance. And the Monday rally in airline stocks was the result of many investors failing to understand the full context of United’s announcement.

Not surprisingly, on Tuesday, U.S. airlines stocks fell back some.

So, if this week’s airline stock price jumps were driven by response to out-of-context news, what’s the real score?

For that answer, let’s turn to Nick Calio, CEO of Airlines For America, the industry’s Washington lobby group.

Speaking Tuesday with CNN International’s Julia Chatterley on her daily podcast “First Move,” Calio said “For the last year we’ve been down, flying 40{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of the people we used to.” He added that that’s a positive number since almost exactly a year ago, in the last half of March 2020, U.S. carriers saw their passenger travel fall to only about 4{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of what it had been in March 2019 as travelers, frightened by Covid-19 simply stopped going anywhere.

Now, thanks to Covid-19 vaccinations, declining daily case reports and pent-up demand for leisure travel, the situation is much improved. “But we’re still burning $150 million cash every single day,” he added.

That’s because not only is the quantity of passenger demand still way, way off from pre-Covid-19 levels, the quality of demand – that is, who is doing the flying – is down even more.

On Friday, March 12, 1.36 million people passed through the Transportation Security Administration’s airport checkpoints. That was the most since March 14 a year ago, when 1.52 million people cleared those same check points. (The check point numbers bottomed out at 87,534 on April 14, 2020.)

But the higher totals passing through TSA checkpoints currently still are way, way down from historical norms. The 1.36 million from last Friday, the kickoff days for this year’s Spring Break travel period, was a whopping 47.7{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} lower than the 2.5 million people who cleared TSA’s checkpoints on March 15, 2019, the kickoff day for Spring Break travel two years ago.

And, again, nearly all the current demand is for the cheapest seats in the back of plane. Business travel remains incredibly weak, and there’s little evidence to suggest it’s going to pick up significantly until 2022 – or beyond.

Raymond James analyst Savanthi Syth this week reported that in a poll of Raymond James customers 18{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} said they don’t expect to fly for business reasons until 2022 or beyond. Another 8{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} said they don’t know when they might travel again for business. That 18{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} figure is down just one percentage point from those who answered the same way in early February, before tens of millions of Americans had received at least one round of Covid-19 vaccination shots, and before Americans were able to judge how fast the national vaccination effort is progressing. Thus, to date there’s scant evidence that vaccinations are having any positive effect on business travel demand.

Beyond that, Syth reported that 24{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of respondents to her firm’s most recent survey do expect that by June 30 they will have traveled by air at least once on business, and that 49{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} anticipate that they will have flown on business at least once by year’s end. But while that points to some positive growth in business travel demand, it’s not near enough for U.S. carriers to experience a truly significant recovery. That’s because in normal conditions, business travel represents only about 35{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of total air travel demand but generates close to 70{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of air travel revenue in the U.S.

Another concern is the near-total absence of revenue from international travel. Both leisure-and business-driven international travel remain almost non-existent because of border closings and significant Covid-19 quarantine policies in place in most nations. Thus, U.S. carriers are being deprived of 90{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} or more of the substantially higher fares paid for foreign travel.

Calio, in his podcast interview Tuesday, highlighted the problem airlines face in trying to offer enough seats to various destinations – domestic and international – to attract travelers – but ending up having to fly lots of empty seats around.

“We can plan but we can’t really forecast,” he said. “We are planning for increased travel and having the seats available over (this) summer. (But) it’s a little bit of a gamble because (if) people are going to fly you need to have seats available… (then) if they don’t fly you are flying empty planes – which we have been.”

In fact, OAG, the global airline industry’s schedule publishing house and a data tracking company, notes in a new report this week that in every month since June 2020 airlines have ended up operating between 2{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} and 21{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} fewer seats in the last week of each month than they operated in the first week of each month. That means that in each of the nine months completed in that time frame, airlines put lots more capacity into the market than demand justified and subsequently had to cancel flights to reduce their costly and chronic over-capacity problems.

For example, by the last week of July 2020 airlines globally were offering 21{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} fewer seats for sale than they were during the first week of June. (Airlines typically re-set their schedules on the first day of each month.) In July they ended up pulling 15{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of the available seats that they began the month offering. That over-capacity adjustment fell to 12{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} in August, then hovered between 5{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} and 8{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} each month until December, when carriers only withdrew 2{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of the capacity they had begun the month offering. But by the end of January and February they respectively pulled out 7{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} and 8{540ccc4681f92a8237c705b0cdebbb9da373ec200da159e6cc1fd9f393be00be} of the capacity that they’d initially had offered in those months.

March data is not yet available. But we do know that at least in the U.S. carriers significantly increased the amount of capacity with which they started the month in anticipation of increased demand around Spring Break and based on some signs of increased leisure demand in the second half of February. Thus, the amount of capacity carriers pull out of the market in the last week of this month could offer observers some insight into whether uptick in leisure travel demand is likely to continue – and perhaps to what degree it will continue – or if it was entirely a factor of stronger-than-anticipated Spring Break demand.