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It has been “a hell of a year” for United Airlines. Delta Air Lines has had “the most difficult year” in its history. And for American Airlines, it was “the most difficult year”. This is how the executives who run these companies have described 2020 in recent weeks.
The airline industry is eager to move forward, but they haven’t figured out how.
Air transport has picked up somewhat in recent months, but it remains deeply depressed from 2019, and no one knows when business will return to more normal levels. Two essential revenue generators for airlines – business and international travel – are likely to sit on the sidelines for a year and possibly much longer.
Today, and at least for the next few months, airlines fly wherever they can. That often means serving a small group of hardy leisure travelers who aren’t discouraged by the pandemic from hitting the ski slopes or the beaches.
“As a quick strategy, fly where the people are,” said Ben Baldanza, former managing director of Spirit Airlines, the low cost airline. “It’s been a real smart strategy, but it’s not a long term way for these airlines to make money.”
But leisure travel offers only limited comfort in an industry so deeply crushed. Tourists and people visiting family and friends typically take up most seats on planes, but airlines are disproportionately dependent on the income of business travelers in the front of the cabin. Before the pandemic, business travel made up about 30% of trips, but 40 to 50% of passenger income, according to Airlines for America, an industry association. And these customers shouldn’t be returning in large numbers anytime soon.
America’s four largest airlines – American, Delta, United and Southwest Airlines – lost more than $ 31 billion last year, and the industry as a whole still loses more than $ 150 million every day, according to one estimate from Airlines for America.
The losses are even greater when you consider that airlines received $ 40 billion in federal grants to help pay their employees and tens of billions more in low-cost government loans. The problem is, airlines these days can’t fly planes with enough passengers at fares high enough to break even.
Industry has spent much of the past year eliminating and saving older, less efficient aircraft from their fleets; renegotiate contracts; and encourage tens of thousands of workers to subscribe to buybacks or early retirement programs.
But that was not enough to offset a nearly two-thirds drop in air travel, as public health experts and the Centers for Disease Control and Prevention continue to discourage travel. Airlines for America does not expect passenger numbers to return to 2019 levels until at least 2023. And airlines may have to wait even longer if the economic recovery falters due to the spread of coronavirus variants or a delay in vaccinations.
Still, airlines say they are optimistic for the coming year.
Southwest said this month’s sales were better than expected. Alaska Airlines said it expects to operate around 80% of flights this summer from 2019, while Hawaiian Airlines offered similarly optimistic forecasts. Delta chief executive Ed Bastian said in a message to customers last week that he expected to see an “inflection point in the spring” as consumer confidence rose, travel restrictions were lifted. relaxed and vaccine distribution increased. Last week, JetBlue began daily flights from New York, Boston and Los Angeles to Miami and added seasonal flights to Key West, its first service from either city.
“The discussion shifts from who is a survivor to who is more involved in the recovery,” said Sheila Kahyaoglu, aerospace and defense analyst at Jefferies, an investment bank. “It will be a question of who can best access certain markets.”
Airlines have certain things going for them. Washington lawmakers appear poised to provide the industry with a third major aid package since the pandemic took hold last spring. A House committee last week backed $ 14 billion in subsidies that airlines could use to pay workers through September, adding it to the coronavirus relief program under consideration in Congress.
Airlines are also doing what they can to stimulate demand.
Delta recently extended its ban on reserving passengers in the middle seats until April and hired a health official. These moves are part of Delta’s effort to market itself as a high-end, health-conscious carrier. Southwest is running deals, including a promising sale of one-way fares as low as $ 50 to celebrate its 50th anniversary. The airline usually has big sales in the fall and sometimes in the summer.
“I don’t think any of us can remember making a wild sale in January, but that’s where we are,” Southwest Managing Director Gary Kelly told investors and reporters. last month. “The goal is simple: we need to stimulate travel. We need to get more bookings. “
Most industry experts say they expect more travelers to return this spring or summer, as the weather improves and more people are vaccinated.
But planning is not easy. Passengers used to book flights months in advance, but now plans are often confirmed within weeks. And trends in reservations have often been fleeting.
“Every time demand has shown signs of life, it has taken another step back,” said Hunter Keay, senior airline analyst at Wolfe Research. “So it’s very difficult for airlines to go to market and get planes to market, because if you get it wrong you just exacerbate the problem of consuming cash.”
Perhaps the most difficult question for airlines and other travel companies is when executives, middle managers and other business travelers will feel comfortable flying. In the last three months of 2020, business travel declined 85% or more to American, Delta and Southwest, according to the airlines.
The American Hotel and Lodging Association, a trade group, has said it doesn’t expect business travel to fully recover until 2024. Other groups believe it could take longer. By comparison, international business travel fell only 13% during the financial crisis a decade ago, but took five years to return to its previous peak, according to McKinsey.
Some experts say business travel may never make a full recovery, with many face-to-face meetings permanently replaced by video conferences and phone calls. Travel for sales meetings, conventions and trade shows are the least likely to be permanently affected, IdeaWorks, an industry consultancy, said in a December report. But shorter trips to meet with co-workers for a few hours – from New York to Washington, for example – could be hit harder, he concluded.
Airlines have more hope, perhaps because they rely heavily on business travel.
About 40% of large corporate customers of Delta expect their own business travel to be fully recouped by 2022, and a further 11% by 2023, Bastian said on a conference call in January, citing internal airline research. Only 7% said business travel might never be fully recovered, while the rest said they didn’t know when things would get back to normal.
American is “very optimistic” that business travel will return with the distribution of vaccines, Vasu Raja, the airline’s chief revenue officer, told investors and reporters last month. But, he added, “the rate of this is not clear at best.”
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