All those business travel chickens the airlines counted? They don’t hatch; Forecast undercutting

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Executives of U.S. airlines who seven weeks ago were enthusiastic about the return to profitability of their industry and businesses this year after the near total collapse in travel demand at the height of the global pandemic of Covid-19 are now relearning the meaning of the old advice against counting chickens before they hatch.

As the second quarter drew to a surprisingly profitable end for most US carriers, it was hard to find anyone in the industry who did not expect at least modest profits for the third and fourth quarters. They were almost certain that a strong recovery in business travel demand would accelerate where the surprisingly large increase in summer leisure travel demand was expected to stop once the children returned to school and that tens of millions of Americans have returned to their desks, 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 talk about their fourth-quarter profit outlook. Thanks to the unexpected surge in Covid-19 cases driven by the arrival of the so-called Delta variant of the virus, demand for pleasure travel began to slow down a bit in late July and then more than a bit throughout. of August. Carriers, including Southwest, which historically had the industry’s best understanding of leisure travel demand, have also started reporting that not only are customers canceling or postponing their leisure trips in August, but that scheduled trip cancellations in September and October were growing rapidly and sales of the new fall fun trips were much lower than expected.

Worse yet, in mid-August, most airlines also quietly – and more recently, less calmly – began to worry about the failure of the almost certain surge in business travel demand. . And while the impact of the Delta variant on the number of new cases reported and hospital beds certainly plays a big part in this shortfall in the number of business trips booked in the fall, for the first time. Now executives at the airline and travel companies are starting to consider that business travel may not return any time soon to what it was before Covid-19 hit the scene. Indeed, some are really starting to wonder if the demand for business travel will ever return to the levels of demand that existed until 2019.

The American Hotel & Lodging Association recently surveyed companies and individual business travelers in the United States and learned that 67% of them now expect to take fewer trips in the future. They also found that 52% of them are likely to cancel their existing travel plans for the coming months and, most importantly, will not be rescheduling those trips for later. And 60% plan to postpone, at a minimum, existing plans for business travel in the coming months.

Certainly, the demand models for hotels and airlines are different from each other. Many business trips are made by car or even by train; and not by plane. But the picture portrayed by this AHLA survey is that of a consequent, more prolonged or even semi-permanent secular decline in demand for business travel. If this picture is even close to accuracy, it will affect airlines just as much, if not more, than hotels, as airlines have historically been structurally even more dependent on the income they derive from business travelers than airlines. hotel companies.

“Business travelers are all standing by the pool, trying to figure out who’s going to go for it,” Marriott CEO Tony Capuano said in an interview last week with Business intern. But like many leaders in the travel industry, Capuano relies on competition between companies for their clients’ business to ultimately lead to the long-awaited return to pre-Covid-19 levels of business travel demand. “What happens when your biggest competitor chooses to do this (seemingly extravagant trip to meet a client) and wins the market? He asked rhetorically? The obvious suggested answer he was referring to is that companies looking to get their travel expenses under control in the future will ultimately be forced by competitive forces to get back on the road just as much as before.

Unfortunately, there is simply not enough real data or experience – yet – to prove or disprove this line of thinking.

But for now, at least, the recovery in business travel demand is at a worrying dead end.

Raymond James’ airline analyst Savanthi Syth released a report late last week, noting that the nine largest US airlines have all downgraded their revenue guidance for the third quarter since in mid-August, weak demand became evident.

Sith said she was “positively surprised” that the cuts in revenue forecasts made by airlines JetBlue, Delta and Alaska were more modest than those of their rivals, but “negatively surprised” by the cut in revenue forecasts especially. important issued by American.

United actually made the largest reduction in its revenue forecast in the third quarter, but that reduction was in line with Sith’s expectations as United has more combined exposure to business travel markets, international travel markets and to business travel markets and owns both coasts, which happens to be where travel demand is lowest.

Delta now expects its third quarter revenue to be down 33% to 35% from what it was in the third quarter of 2019, before the pandemic. Previously, Delta had forecast a drop in revenue of 30% to 35% compared to the third quarter of 2019.

Alaska Airlines now reports that its third quarter revenue compared to the third quarter of 2019 will be down 19% to 21% from its previous forecast of only 17% and 20% decline.

JetBlue’s third quarter revenue decline will be 6% and 9%, compared to a previous drop of just 4% to 9%.

American, meanwhile, now expects its third quarter revenue to decline by 24% to 28% from the third quarter of 2019. Just a month ago, American was forecasting a decline of around 20%. only.

Southwest now expects its third quarter revenue to decline by 18-20% from the third quarter of 2019. Previously, Southwest expected its third quarter revenue to decline by only 15-20%.

United, meanwhile, are now saying their third-quarter revenue will be down about 33% from their same period in 2019. Previously, United forecasted a drop in revenue closer to 26% or less.

In its note accompanying its revised forecast report, Sith pointed out that all U.S. carriers are using easing demand levels this fall to reduce flight capacity, operational cuts that could also reduce the pressure carriers have been under this summer. when they struggled to staff all the flights they had scheduled. Due to this labor shortage, U.S. airlines canceled thousands of flights this summer, upsetting passengers whose travel plans have been disrupted.

Southwest officials said they expected to cut nearly 2,700 flights from its third-quarter schedule in response to the lingering effects of Hurricane Ida on travel demand in areas affected by this powerful storm. of wind and rain. Other carriers, to varying degrees, are also likely feeling the negative effects of this storm. But the Dallas-based king of low-cost carriers has said that even after making these schedule reductions, its capacity in the third quarter will be around 5% of its capacity in the third quarter of 2019. Prior to recent forecast revisions and Hurricane Ida, Southwest expected its current quarter capacity to be roughly equal to its third quarter 2019 capacity. This clearly shows how aggressive Southwest management has been in rebuilding its program. operation and service from its Covid-19 nadir in May 2020.

“A silver lining,” Sith noted, is that the reduction in flight capacity this fall, “comes around the time of budget planning 2022, likely injecting some caution following the (airlines) exuberance of the strong. summer request as a backdrop “.

While negative revisions to revenue forecasts appear to have surprised airline managers, investors do not appear to have been similarly surprised. All of the long-established U.S. carriers have seen their stock prices drop over the past six months, even as they talk about the strength of the recovery in leisure travel demand they are seeing. Since peaking in early April, airline stock prices have fallen from 21% to 37%. Breeze, which launched its service this year, has seen its price change only about 45 cents since launching in May. Avelo Airlines, which started flying in April, does not have any publicly traded shares.


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