US airlines are forecasting a record-breaking summer after a strong March, but the industry has thus far fared poorly in calling the post-Covid recovery.
United Airlines chief executive Scott Kirby said last week that the US air travel industry is now "exiting the tunnel," as his company joined American Airlines in forecasting record revenues in the second quarter. Companies are optimistic demand is on its way back to pre-pandemic levels after US passenger numbers at US airports trended around 10pc shy of 2019 levels in the last week of March.
But airlines continued to burn money in the first quarter, with American Airlines, United Airlines and Delta Air Lines losing more than $4.3bn combined in the period due to a combination of higher jet costs, staffing issues and inflation.
The sour results reflect how airlines have thus far missed the mark in forecasting how quickly demand will recover in the wake of Covid-19 and may speak to fundamental shifts in consumer — and even employee — behavior that companies are loath to acknowledge.
Delta erred late last year when it predicted Omicron would have a "limited impact" on demand in the first quarter, and American last week downgraded full-year capacity guidance to 92-94pc of 2019 levels, from a previous 95pc target. United announced last week it will push back nine plane deliveries from this year to 2023, due in part to a pilot shortage that will challenge carriers' ability to address any potential rise in demand.
Similar missteps, downgrades and capex cuts have become a hallmark of the post-Covid-19 air travel industry, with executives stubbornly arguing that business demand is coming back and that consumers will shrug off historic inflation and pay higher airfare prices to cover higher jet fuel costs.
"Long-term this industry has proven that it has the ability to recapture increases in the cost of fuel and be profitable at elevated fuel prices," said American Airlines chief financial officer Derek Kerr last week. "We believe this time is no different."
Buy the rumor, sell the past
American's confidence is based partly on bumper profits US airlines reported in the run-up to the Covid-19 crisis. The company — the US' largest carrier in terms of fleet size with 1,453 aircraft — reported 24 consecutive profitable quarters before the first quarter of 2020, when Covid-19-related travel restrictions hushed demand for air travel.
Other major carriers experienced similar streaks in the years before Covid-19 and are selling a recent hike in airfare prices as a time-tested solution for higher jet costs.
"I bet when you go on vacation you pay more for one night at your hotel or pay more for your rental car to get to the airport than you do for your airfare," United's Kirby said. "We are not anywhere close to the demand destruction point of the curve."
But the recent increase in jet fuel costs clouds the outlook for an industry already struggling to meet its own operational targets and will likely offset second quarter revenue growth. Jet fuel averaged around $3.04/USG in New York Harbor in the first quarter, the highest quarterly mark recorded since 2014.
Prices have risen even further in April, to an unprecedented monthly average around $6.05/USG up to 21 April. History suggests these costs could be toxic: American Airlines lost over $1.8bn in the last year it paid over $3/USG for jet fuel, in 2013, undercutting its blasé stance on higher jet costs.
Delta was less cavalier about concerns that airfare will rise high enough to destroy demand and is watching for signs that demand might pull back at a certain price point.
"We are looking for pricing resistance," said chief executive Ed Bastian. "When we start to see pricing, particularly with high input costs like fuel, starting to challenge our demand and supply assumptions, then we will take the next step."
Everyone is wrong
There are other reasons to question airlines' outlook for second quarter recovery. US online travel agency Hopper, which recently forecast domestic airfare will rise to an all-time high of $361 roundtrip in May, expects most of the recovery in domestic air travel demand post-Omicron "has already played out."
And analysts in the financial community have questioned whether corporate demand will ever recover amid widespread adoption of remote work business models.
But airlines say tightening capacity also reflects a structural labor issue in the US.
United estimates that the US airline industry needs to hire 13,000 pilots this year, but the aviation sector's training pipeline can only accommodate around 5,000-7,000 new pilots each year. The company said this shortage will tighten capacity around the industry for at least five years but expects large airlines will benefit from broader hiring pipelines and stronger margins from premium and corporate customers compared to smaller rivals.
"Every single person that has a spreadsheet with a forecast of industry capacity in the years to come is wrong and probably wrong by a lot," Kirby said. "The pilot shortage for the industry is real and most airlines are simply not going to be able to realize their capacity plans because there simply are not enough pilots."
