It's Watch-And-Wait For U.S. Airlines

Carriers say demand has softened. Also in this issue: both Ed Bastian and Scott Kirby poked at American, JetBlue needs to pick a partner, and Southwest is done with fuel hedging.

Dear readers,

By now, you should know that U.S. airlines say there’s demand softness in the domestic market, which they blame on travelers concerned about safety, plus political and economic uncertainty. This is no early-Covid redux (travelers are still buying plenty of plane tickets) but several airlines reported last week at last week’s J.P. Morgan Industrials Conference that demand in February and parts of March did not met expectations.

First the safety aspect. Ed Bastian noted at the conference that a chunk of Delta’s customers had never seen a U.S. domestic plane crash as adults, and that “the deadliest aircraft incident in almost 25 years caused a lot of shock amongst our consumers [and] there's a whole generation of people traveling these days that didn't realize these things could happen.”¹ In addition, he said, Delta’s incident in Toronto (when an aircraft flipped after landing) probably hurt bookings. These concerns should dissipate with time, though presumably every day that aircraft safety is in the news (like American’s engine fire last week in Denver) is not so good for bookings.

Still, let’s not delude ourselves into thinking that it’s all about safety. Bastian said it became apparent by late February that “there was something going on with economic sentiment, something going on with consumer confidence.” Executives from other airlines shared similar comments, telling investors that it’s mostly a domestic issue. Southwest, American, and Delta all slashed guidance last week even though fuel prices are down — something that should boost profits. United, meanwhile, told investors that its EPS would come in at the low end of the range it set earlier, but remember that CFO Mike Leskinen hates missing guidance and usually sets it conservatively.

I can't tell you what comes next. Travel around Washington, D.C. is unlikely to bounce back quickly because the government has made so many spending cuts, including on how much it spends on airfare. But in other domestic markets, airlines last week wanted us to know that this might be fleeting, or the type of thing that requires only a modest capacity reduction or some light discounting.

Without wading too much into politics, I'll note these are not normal times, and I'm not sure that airlines are going to have as much control as they would like about who they fly on their airplanes and what prices they pay. U.S. consumer sentiment is slipping, according to a key economic survey, and business travel tends to fall any time business leaders are uncertain about inflation, demand, trade wars, or whatever comes next. Add to that the fact that a significant number of foreign travelers are moving the United States off their must-visit list, (it’s not just Canadians), and you can see why airlines executives should be nervous. In the spring and summer travel season, American, Delta, and United rely on U.S. point-of-sale, and it’s wonderful that the dollar is still strong, but Americans heading to Rome or Barcelona don’t fill every seat. And of course, U.S. airlines have foreign joint venture partners, with whom they share revenue and sometimes costs.

I know Scott Kirby loves to say “hope is not a strategy,” which is why United is moving up the retirement of 21 aircraft and might take more action if demand further wanes. But I don't know: if I were a U.S. airline executive, I might be hoping the government takes action to calm consumers and investors and business owners, so that they'll be less worried and more willing to spend. Because if people don't feel as if they can afford to travel anymore, airlines will need to revert to the same-old cycle of cuts — both to capacity and product quality.²

I'll watch this closely in the coming weeks. For today, I want to flag some nuggets from last week's big-time investor event that you may not have seen, including one about a big-time clash of egos. It’s fun to see Bastian and Kirby take shots at American, right?