Will the latest twist in the coronavirus pandemic hamper recent gains made by the airline industry?
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TUS airlines had high hopes for an industry recovery in 2021. On the heels of last year, one of the worst in aviation history – the coronavirus pandemic having emptied airports and filled airline balance sheets – the rollout of COVID-19 vaccines earlier this year sparked bullish predictions of an air travel “boom” and a return to profitability.
But then came the Delta variant and now the fast-spreading Omicron version. International entry rules are tightening and some countries are experiencing a new wave of COVID infections. So what does this latest hurdle mean for airlines and are there bright spots for 2022?
The answer to the latter is a qualified “yes” based on a slew of financial reports from major airlines over the past few days. “Fourth quarter results are better than airlines expected,” said Henry Harteveldt, travel industry analyst and co-founder of Atmosphere Research. Travel volume is on the rise, especially for vacation travel to North America (and despite Omicron), flights are full, and airlines are successful in ‘getting’ customers to pay more for legroom or more. a more generous baggage allowance, he adds.
Delta Air Lines, for example, said Thursday that it is now forecasting adjusted earnings of around $ 200 million in the last quarter of this year; this is after an earlier prediction of a “modest” loss over the period due to rising fuel prices, typically the biggest expense for airlines outside of the workforce. But fuel prices have since fallen, and at the same time the demand for airline tickets has increased. The airline previously reported third-quarter profit of $ 1.2 billion.
Other major U.S. carriers, such as American Airlines and United Airlines, were also in the dark in the third quarter of 2021, but that was in part due to ongoing federal assistance in the event of a pandemic. However, as airlines cross the course to 2022, they will no longer be able to depend on Uncle Sam for help (the pandemic program is over).
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The recovery, as it stands, relies primarily on heavy domestic traffic and to nearby destinations in Canada, Mexico and the Caribbean. “Long-distance international travel is the main uncertainty,” says Harteveldt, especially given the rapidly changing rules for US visitors to many popular destinations in Europe.
For this reason, the predominantly national carrier Southwest Airlines is one of the big winners heading into next year. It has consistently made money – a rarity in the industry – by posting 47 consecutive years of profitability through 2019. It now expects to be profitable again in the fourth quarter of 2021.
However, the picture is not entirely rosy either: Southwest said in a presentation to investors that it expects 2022 to be “a year of choppy transition”, during which capacity will be stable. , at most about 2% above last year, and fluctuating. fuel prices will be another wild card.
Still, as outgoing Southwest CEO Gary Kelly told AFAR at a recent Wings Club event in New York City, “We are very optimistic about next year,” so much so that the carrier expects to take delivery of more than 100 new aircraft in 2022. alone (in part to remove older, less efficient aircraft). The airline has kept costs low by operating Boeing 737 aircraft exclusively and offering few frills, one-class service, and quick turns to airports.
“They are the mother of all low cost carriers,” said Michael Derchin, a longtime Wall Street airline analyst who writes the “Heard in the Hangar” newsletter. He notes that the airline’s contrarian policies – no fees for checked baggage or ticket changes (Southwest had no change fees long before it became a pandemic trend to abandon them) – have him earned a loyal following. The airline even added 18 new airports to its list this year and expanded its flight network from the Americas to include Hawai’i.
The biggest uncertainty for the industry as a whole is what will happen in what has traditionally been the main drivers of airline profits: business travel and premium class traffic on long-haul flights.
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“The main impact will be on long-haul travel to Europe,” predicts Harteveldt. Transatlantic travel “has seen demand drop sharply as many restrictions are imposed” due to the rapid spread of Omicron, among other factors, and this has already resulted in a drop in advance bookings for the former. semester of next year.
The outlook for 2022 – there is still some turbulence to come
Airline trade groups are also adding a caveat to their forecasts for the coming year. In an industry webinar earlier this week, International Air Transport Association (IATA) chief Willie Walsh said the wave of new travel restrictions in response to Omicron will likely dampen demand for international flights. over the next few months, although it is too early to say how severe the impact will be. And in a new report on the impact of COVID-19 on the industry, the national airlines association Airlines for America reported that last month, international travel from the United States was still down by 41 % from November 2019 levels.
The association also noted that airline fleet capacity is around 7% lower than it was before the pandemic, and that “a return to 2019 levels largely depends on the return of travel business “, a prospect which is far from certain.
Meanwhile, American airlines are also grappling with the same issues that plague many employers across the country. Staff shortages have affected airport services, ranging from baggage handling to customer service jobs. Kelly from Southwest said the labor shortage on top of the never-ending pandemic is the biggest obstacle to airlines plans to restore capacity to pre-COVID levels next year.
On the bright side for consumers, however, the Airlines for America report noted that “average airfares remain below pre-pandemic levels,” and in the second quarter of this year, prices were down 36%. compared to the same period two years ago.
And for airlines, the latest spike in COVID cases presents an unexpected benefit, says Harteveldt. “Thanks to Omicron, we are seeing more and more people getting vaccinated now. And that, more than anything, will be the key to a sustained recovery in air travel.
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