Business Class seats like these aboard an American Airlines plane in Miami, are still going largely ... [+] unsold, along with a lot of
U.S. airline executives that seven weeks ago were clucking excitedly about their industry’s and their companies’ return to profitability this year after the near-total collapse of travel demand during the peak of the Covid-19 global pandemic now are re-learning the meaning of the old advice against counting chickens before they hatch.
As the second quarter came to a surprisingly profitable close for most U.S. carriers it was hard to find anyone in the business who wasn’t forecasting at least modest profits in the third and fourth quarter. They were all-but-certain that a big recovery of business travel demand was going to pick up right where the surprisingly strong surge in summer leisure travel demand was expected to leave off once kids went back to school and tens of millions of Americans returned to their offices, many for the first time since March 2020.
But now the industry will be lucky if more than two of its members report small third quarter profits – and none of them are yet willing to even talk about their profit prospects for the fourth quarter. Thanks to the unexpected jump in Covid-19 cases driven by the arrival of the so-called Delta variant of the virus leisure travel demand began softening a bit in late July, and then by more than a bit throughout August. Carriers, including Southwest, which historically has had the industry’s best understanding of leisure travel demand, also began reporting that not only were customers canceling or postponing leisure trips in August, but that cancellations of planned September and October trips were rising rapidly and that sales of new fall fun trips were much weaker than previously expected.
Worse, by mid-August most airlines also began worrying quietly – and more recently not-so-quietly – about the failure of the almost-certain jump in business travel demand to materialize. And while the Delta variant’s impact on the number of new cases reported and hospital beds certainly is playing a big role in that shortfall in the number of fall business trips being booked, for the first time, leaders in and around the airline and travel businesses are beginning to consider that business travel may not come all the way back any time soon to where it was before Covid-19 entered the picture. Indeed, some are now actually beginning to contemplate whether business travel demand will ever fully recover to the demand levels that existed through 2019.
The American Hotel & Lodging Association recently surveyed corporations and individual business travelers around the U.S. and learned that 67% of them now expect to take fewer trips going forward. They also discovered that 52% of them are likely to cancel existing travel plans for the months ahead and, importantly, won’t rescheduled those trips for later. And 60% are planning to, at a minimum, postpone existing plans for business trips in the months ahead.
To be sure, demand patterns for hotels and airlines are different from one another. Lots of business travel gets conducted by automobile, or even train; and not by airplane. But the picture painted by that AHLA survey is that of a consequential, more prolonged or even semi-permanent secular decline in business travel demand. If that picture is even close to accurate, it will impact airlines just as much, if not more than the hotels because airlines structurally always have been even more dependent on the revenue they get from business travelers than have been hotel companies.
“Business travelers are all standing around the edge of the pool, trying to figure out who’s going to jump in,” Marriott CEO Tony Capuano said in an interview last week with Business Insider. But like a lot of travel industry leaders, Capuano is banking on competition among businesses for the business of their customers eventually to drive the long-awaited return to pre-Covid-19 levels of business travel demand. “What happens when your biggest competitor chooses to actually make that (seemingly extravagant trip to meet a customer) and wins the business?” he asked rhetorically? The obvious suggested answer to which he was alluding is that those businesses that seek rein in their travel spending going forward eventually will be forced by competitive forces to go back out on the road just as much as before.
Unfortunately, there’s simply not enough data or actual experience – yet – to prove or disprove that line of thinking.
But for now, at least, the recovery of business travel demand has gone into a worrisome stall.
Raymond James airline analyst Savanthi Syth issued a report late last week noting that the nine largest U.S. airlines all have revised their third quarter revenue forecasts significantly downward since mid-August as the weak demand numbers became obvious.
Sith said she is “positively surprised” that the revenue forecast reductions made by JetBlue, Delta and Alaska airlines were more modest than those made by their rivals, but “negatively surprised” by the especially large revenue forecast reduction issued by American.
United actually made the largest cut in its third quarter revenue forecast, but that cut was inline with Sith’s expectations because United has more combined exposure to business travel markets, international travel markets, and business travel markets up and own both coasts, all of which happen to be where travel demand is weakest.
Delta now forecasts that its third quarter revenue will be down by between 33% and 35% from what it was in the third quarter of 2019, before the pandemic. Previously Delta had forecast a revenue drop of 30% to 35% vs. the third quarter of 2019.
Alaska Airlines now says its third quarter revenue vs. 2019’s third quarter will be down by between 19% and 21% vs. its previous forecast decline of just 17% and 20%.
JetBlue’s third quarter revenue drop will be 6% and 9%, vs. a previous drop of only 4% to 9%.
American, meanwhile, now expects its third quarter revenues be down by between 24% and 28% when compared with the third quarter of 2019. Just a month ago American was forecasting that drop to be only around 20%.
Southwest now expects its third quarter revenue to be down by between 18% and 20% compared with the third quarter of 2019. Previously Southwest was forecasting that’s its third quarter revenue would be down by only 15% to 20%.
United, meanwhile, now says its third quarter revenue will be down about 33% compared with the their same period in 2019. Previously United was forecasting a revenue drop closer to 26% or less.
In her note accompanying her report on the revised forecasts, Sith pointed that all U.S. carriers are using softening demand levels this fall to reduce their flying capacity, operational cutbacks that also could reduce the pressure that carriers experienced this summer when they struggled to staff all the flights that they had scheduled. As a result of that labor shortage, U.S. airlines canceled thousands of flights this summer, upsetting passengers whose travel plans were disrupted.
Southwest officials say they expect to cut nearly 2,700 flights from its third quarter schedule as specific response to the lingering effects of Hurricane Ida on travel demand in areas impacted by that powerful wind and rain storm. Other carriers, to varying degrees, likely are feeling the negative effects of that storm as well. But the Dallas-based king of the discount carriers says that even after making those schedule cuts, its third quarter capacity will be within about 5% of its third quarter 2019 capacity. Before the recent forecast revisions and Hurricane Ida, Southwest was expecting its capacity in the current quarter to be about even with its third quarter 2019 capacity. That’s an clear indication of just how aggressive Southwest’s management has been about rebuilding its operation and service schedule since its Covid-19 nadir in May 2020.
“A silver lining,” Sith noted, is that scaleback in flight capacity this fall, “comes around the time of 2022 budget planning, likely injecting some caution following the (airlines’) exuberance of the strong summer demand backdrop.”
While the negative revenue forecast revisions seem to have caught airline managers by surprise, investors do not seem to have been similarly surprised. All long-established all U.S. carriers have seen their stock prices slide downhill over the last six months even as they talked up the strength of the leisure travel demand recovery they were seeing. Since peaking in early April, airline share prices have declined by between 21% and 37%. Breeze, which launched service this year, has seen its price vary only by about 45 cents since its launch May. Avelo airlines, which began flying in April, does not have publicly traded shares.