• Thu. Aug 4th, 2022

Infrastructure issues ‘afflict’ airline industry: analyst

ByKimberly A. Brochu

Jul 21, 2022

Helane Becker, Senior Research Analyst at Cowen, speaks with Yahoo Finance Live to examine United and American Airlines revenue reports and the factors that are having the biggest impact on the airline industry.

Video transcript

David Briggs: American Airlines is also the latest to report earnings, posting its first quarterly profit without government assistance since the start of the pandemic – we spoke to Seana about this a bit – although it has scaled back its growth plans due to disruptions. continues, and that seems to be what is hammering this stock, as you can see, down more than 8%.

Let’s talk with Helane Becker, senior research analyst at Cowen. Nice to see you. Is it as good as it gets on the heels of what we’ve seen with United both warning of a cut in profits to come?

HELANE BECKER: Yeah, I think the way to think about it is that we’re probably somewhere in the middle of what’s likely to happen over the next six or nine months. I think what plagues the industry, in general, is infrastructure issues. It’s not just the airlines. Obviously, all their support staff, the air traffic control of the airport and its baggage handler are on strike in Europe [INAUDIBLE]it’s just that everything weighs on the industry.

People want to travel. I heard you talking about Seana and a voyage of vengeance. It’s been a great summer. I asked all the airlines when we’d expect to see – or when they expect to see a drop because air travel is generally good until it’s bad, and you don’t see really these reservations slow down.

But having said that, we saw a slowdown in June. We’ve seen a slowdown in the recovery, not so much in leisure because, going back to your previous point, leisure travelers will be good at least through August. And then in September, as people go back to the office and the kids go back to school, we’ll probably see the return of business travel. And the question really is, and I think that’s what’s weighing on these two stocks in particular, are companies going to put the brakes on business travel if we’re in an economic downturn and they’re the customers airlines. So think of large, small and…

David Briggs: Helen.

HELANE BECKER: –will medium-sized companies experience a slowdown? Yes David?

David Briggs: Sorry to interrupt you. Just to follow up on that point, American said this morning that business travel is back 75% to pre-pandemic levels. I think the question is also, is this 100% the new normal? Is it max?

HELANE BECKER: Yes. I don’t know the answer to this question, but I think the answer is yes. I think it’s going to be very difficult to get back to 2019 levels for business travel, given the high cost and disruption. People want to go…if you’re taking a day trip, you want to know you’re coming back today. If you’re taking an overnight trip, you don’t want it to last multiple days. So I think you’re finding that businesses are also putting the brakes on travel. So yeah, 75%, 80% of 2018 levels might just be as good as it gets.

RACHELLE AKUFFO: So Helane, in terms of the biggest expense for airlines, obviously there’s jet fuel, but we continue to see some of these staffing shortages that are plaguing the industry as well. What do you think is going to weigh most heavily on the cost of inputs for some of these airlines?

HELANE BECKER: Yes, Rachelle, that’s a great question. I think, first of all, CapEx. Capital expenditure is quite high as airlines struggle to meet 2050 targets. I know this seems like a very long time, but airlines that order planes now and take delivery between 22 and 27 are going to operate these planes at that time. So you have big CapEx numbers, not so much for American, but of course for United. I think it’s something like $20 billion over the next four years. So that’s number one.

Second, you mentioned the cost of fuel. The cost of fuel – and that’s not even the only cost of fuel. These are the highest refining margins we have ever seen. It is therefore the second cost of inputs that is of concern. We talked a bit with David and Seana about infrastructure costs, so it’s high. Maintenance costs are a lament.

And then airport fees are also high, because airports have to attract people. The contractors who do some of the third parties–the contractors who do some of the work for the airlines raise salaries to attract and retain staff. So yeah, overall it puts pressure on costs, which puts pressure on margins if you can’t recoup that in revenue. And to David’s question about demand, as demand – if demand doesn’t stay strong in the fourth quarter, then you’re going to have margin compression, and that’s really what the market is concerned about.

SEANA SMITH: Yes, Helane, you mentioned that we are seeing additional costs, especially when we look at what they are doing to attract some of these pilots. The Americans say they will raise wages. They will be adding bonuses to try to alleviate the pilot shortage they are seeing.

How long until you think they have the number of pilots they need to meet this demand? I know you were saying it might be difficult for six to nine months. Are we nine months from now, we could go back to those, in quotes, “normal times?”

HELANE BECKER: No. No. No, I was just thinking six to nine months in terms of maybe everyone but the pilots. I think it will take a few years to get back to that level. And the reason is that it takes two to three years to train a pilot. And then to get those hours, the 1,500 hours that they need to be able to carry commercial passengers, it takes four to five years.

And what American also said this morning that you’ve probably heard is that their regional operation is smaller, and going forward a lot of planes — a lot of routes are going to be flown by mainline aircraft. Well, it’s because they don’t have enough pilots in the regional network. Think of those little planes, the 50 to 70 seaters. They require 10 pilots per aircraft. So it’s two crews, and each plane needs five crews. So they have 150 parked. This means they are 1,500 pilots short.

United has 100 planes parked. There are 1,000 pilots missing in this regional category. So it will take years for it to recover. And the corollary is that small and medium-sized towns that are less than a two-hour drive from a hub, for example, are going to lose their service. And for cities that maintain service, fares will increase to recoup the cost.

David Briggs: And aside from the pilot shortage, perhaps the biggest question hanging over the industry is the Big Ben parliament, as I call it, of the airline industry, which is the Spirit merger. Postpone that, the vote, I think four times now I’ve lost count, with JetBlue or Frontier. How and when does it end, if you can in about 20 seconds?

HELANE BECKER: Yes. I think it ends with, most likely, Frontier leaving and JetBlue winning, if you can call it that, the bid for Spirit. It is clear that they do not have the votes. So they had to postpone the vote, and I don’t think it will go anywhere, frankly.

SEANA SMITH: OK. Helane, we would love to see you again to talk a bit more about this merger and what it means…

HELANE BECKER: Sure.

SEANA SMITH: — more broadly, for the industry, but we have to stop there. Helene Becker, thank you very much for joining us.