US airlines struggle amid 'foggy' demand outlook

US airlines are rethinking flight plans and financial outlooks as the emergence of the Covid-19 Delta variant sets the stage for a turbulent third quarter.

The latter half of 2021 was billed as something of a return to form for the air travel sector, with US carriers predicting corporate travel would resume alongside the release of pent-up recreational demand.

But rising infection and hospitalization rates from the Delta variant caused corporations large and small to push back their return-to-work schemes, stymieing business travel. And international flights remained grounded after the US government did little to change Covid-related flight restrictions implemented in March 2020, while European and Asia-Pacific countries either renewed or expanded travel bans.

Bullishness for business travel was a common feature of US airlines' second quarter earnings calls, with several citing business clients' eagerness to renew corporate travel programs. But those expectations were premature, several executives conceded this month at a conference coordinated by US bank Cowen.

"We saw a great response from surveys to our business customers [in the second quarter], but all that's been delayed by probably three or four months, or more likely early next year at this point," United chief commercial officer Andrew Nocella said. "The crystal balls have been a little bit foggy through this crisis, to say the least."

Perhaps equally troubling for airlines is how customers have adapted to the uncertainty of booking air travel amid outbreaks of the more infectious Delta variant. Many customers have been loath to book flights far in advance, leading to later bookings and more cancellations closer to gate time. US travelers prior to the pandemic typically booked domestic flights on travel platform Hopper about 45-50 days in advance of departure, but in August that dropped to an average of 35 days.

The UK's decision to reopen its borders to vaccinated Americans brought some enthusiasm for cross-Atlantic flights in July, but the trend toward later booking has also emerged in the UK, tempering benefits of the reopening for US carriers. Over 40pc of travelers in 2021 are booking within two weeks of departure, compared to 22pc in 2019, Pablo Caspers, chief travel officer for European travel agency eDreams ODIGEO, told Argus.

These behavioral changes make it harder for airlines to plan and were partly to blame when United Airlines, American Airlines, Southwest Airlines, Delta Air Lines, JetBlue and Alaska Air Group reduced expectations for third quarter profit.

Passenger sag

Rather than showcasing the kind of second half demand surge that many in the industry had expected, passenger numbers have flagged, especially leading into the trough period of September.

While travelers are not cancelling holiday reservations, they also are not booking many fall flights, Alaska Air Group chief financial officer Shane Tackett said.

"It's more a lack of bookings near-in in September and October that we would have been expecting by now," Tackett said on 9 September.

US traveler throughput in the week ended 10 September fell to a 16-week low of 11.8mn, down by 23pc from the same week in 2019, prior to the pandemic, according to Transportation Security Administration (TSA) data. That total marks the seventh consecutive week that airline travel fell from the prior week, and the tenth straight week that travel was 17-26pc lower than in the same period of 2019.

Some carriers have cut flights as a means of managing the unpredictable demand environment. Southwest plans to trim its fall route schedule by 27 flights per day in September and 162 per day in October. United is reducing capacity for the lucrative Thanksgiving and Christmas period.

"We don't want to get too far in front of our skis," United's Nocella said. "We'll let the actual numbers determine our capacity deployment, rather than what we feel is going to happen."

Cargo carryover

Airlines are getting some relief from rising cargo demand, pushing passenger craft into service as long-haul cargo transport planes.

The rise in cargo demand is reflected in jet fuel demand, which is rising as passenger flights fall. Jet fuel product supplied — a proxy for national demand — averaged 1.62mn b/d during the four weeks ended 3 September, the highest in 19 months and down by just 9.3pc from the same period in 2019, according to Energy Information Administration (EIA) data. It has since slipped slightly off that high mark for the week ended 10 September.

United, which operates the world's second-largest widebody fleet, more than doubled second quarter cargo revenue to $606mn from $295mn two years earlier. The airline last week announced the return of five more Boeing 777-300 models back into cargo service, despite saying in April that it would reserve widebody planes for commercial travel. But the airline sees the shift as short-lived.

"Cargo post-pandemic simply can't be as big as during the pandemic," United's Nocella said.

By Dylan Chase