Outlook 2023: North American airlines exhibit optimism, despite market challenges

Summary

• US airlines operating across all business models remain optimistic about strong demand trends in 2023.
• But those operators are facing cost escalation after tough negotiations with pilots.
• Canada's airlines are also confident of robust demand remaining intact for 2023.
• New start-ups are plotting to spread their wings in Canada and beyond.

Strong US demand shows no signs of slowing down

US airlines operating across all business models remained optimistic about demand as 2022 drew to a close.

The recovery in the leisure passenger segment was complete, and corporate traffic continued to recover at a steady pace.

At the end of 3Q2022 Delta Air Lines said that its domestic revenue for the quarter was higher than in 2019, and results from its latest corporate survey showed nearly 90% of the airline's corporate accounts expected travel to remain at current levels, or increase, during 4Q2022.

Although Delta was mindful of economic headwinds, its CEO Ed Bastian said that "demand has not come close to being quenched by a hectic summer travel season."

Management at the US ultra-low cost carrier (ULCC) Frontier Airlines explained that the company had polled its customers to gain future insight as to how they were thinking about travel.

"The results of the survey reveals an inclination to fly more frequently than they did pre-pandemic, with half of the survey respondents indicating they now have more money and more flexibility to do so", Frontier CEO Barry Biffle said.

US capacity is constrained by staffing and supply chain challenges

But US airlines also face some operational challenges, including staffing issues and supply chain bottlenecks that could hinder a full restoration of pre-crisis capacity.

"Industry supply is constrained by aircraft availability, regional pilot shortages, and hiring and training needs", Mr Bastian said.

"With record high fuel prices and increasing cost of capital, the hurdle rate is rising for incremental capacity across an industry that's still restoring its financial condition post-pandemic", he added.

Indeed, data from CAPA and OAG show that US system ASKs in early 2023 will fall just below 2019 levels.

Many operators are still trying determine specific delivery streams from Airbus and Boeing for the year, and until more clarity emerges it will be tough for the country's airlines to be precise in their capacity forecasts.

US weekly system ASKs: from 2019 to early 2023 (projected)

Source: CAPA - Centre for Aviation and OAG

US airlines brace for significant increases in pilot pay

Pilot shortages at US regional airlines have triggered somewhat of a ripple effect with respect to pay.

During 2022 American Airlines forged a deal with pilots at its wholly owned regional subsidiaries that entails an hourly rate of USD90/hr for first officers and USD146/hr for captains.

Phoenix-based Mesa Airlines followed with its own agreement, in which first officers will earn USD100/hr and captains' salaries will rise to USD150/hr - which is more than a doubling of their previous wages.

Those rates are brushing up to, or in some cases exceeding, pay scales at ultra-low cost airlines.

But the reality is that US pilots currently have unprecedented leverage with respect to negotiations, and will continue to flex their muscle to gain what they deem as industry-leading pay rates.

Alaska Air Group inked a deal that resulted in pay increases of 22%-23% for most pilots, which ultimately narrowed the salary gap between Alaska and the three large US network airlines (American Airlines, Delta Air Lines and United Airlines).

As a result, both American and United rejected tentative agreements.

At the time of this report, Delta had reached an agreement in principle with its pilots for a 31% pay increase over four years and a 22% signing bonus, according to a report from Cowen.

Whether or not Delta's pilots will endorse the agreement is still unknown, but obviously the stakes are increased for American and United as their pilot negotiations continue.

As those negotiations progress, labour cost escalation will be a near universal challenge for US airlines in 2023 - even as demand strength shows no signs of weakening.

The biggest uncertainty is if US operators can hold pricing high enough to cover the cost escalation.

Air Canada sees robust trends in nearly all of its geographies

Canada's airlines are exuding a level of confidence regarding demand that is similar to that of their US counterparts.

The country's largest airline, Air Canada, grew its trans Atlantic revenues in 3Q2022 by 10% compared with 2019, on 9% less capacity.

"All of our Atlantic routes met or exceeded our expectations", said Air Canada Chief Commercial Officer Lucie Guillemette.

In US transborder markets, Air Canada's recovery also occurred at a solid pace: the company's 3Q2022 transborder revenues reached 92% of 2019 levels on a capacity restoration of 89%.

Even in a domestic market that Ms Guillemette described as "very aggressive," Air Canada's domestic passenger revenue performed above expectations. Its 3Q2022 revenue of CAD$1.5 billion in that segment was just 5% below 3Q2019 levels, and domestic yields actually increased by 12% compared with 2019.

Canada's new low cost start-ups are plotting ambitious growth

Some of the aggressiveness Ms Guillemette was referring to is expansion by a new crop of ultra-low cost carriers that have emerged during the past few years, and those airlines believe that Canada is a market ripe for stimulation.

WestJet's ultra-low cost subsidiary Swoop has added six Boeing 737-8 narrowbodies to its fleet, bringing its total aircraft count to 16. The airline has also added 12 new destinations in 2022.

Swoop's growth comes as other Canadian ULCCs are plotting their own rapid expansion.

Flair Airlines has announced its intent to add 50% more capacity during (northern) summer 2023.

Canada's latest ULCC Lynx Air is planning to enter the US transborder market in early 2023, when it launches flights to four new destinations in the US.

Lynx Air currently operates six Boeing 737-8s and has 43 Boeing 737 MAX narrowbodies on order, according to the CAPA Fleet Database.

The flurry of activity among Canada's ULCCs is spurring questions about the market's ability to support the growth that those airlines are planning.

But those airlines remain convinced that opportunities for the low cost business model are even more pronounced in a post-pandemic environment, as demand shows no signs of slowing down.

And despite all the growth planned by the country's low cost operators, Canada's ASKs in early 2023 are projected to fall below pre-crisis (COVID pandemic) levels.

Canada: weekly system ASKs, from 2019 to early 2023 (projected)

Source: CAPA - Centre for Aviation and OAG

For now, demand seems robust enough to absorb some on the near-term capacity growth; however, yields could come under pressure - particularly if economic uncertainty lingers.

North American airlines return to profitability, but uncertainty remains

IATA has calculated that North America is the only region to return to profitability in 2022, with region's airlines posting profits of USD9.9 billion.

Their profits will grow to USD11.4 billion in 2023.

The prospects for North American airlines continue look promising, but there are nuanced trends in the US and Canada taking shape that will certainly crystallise throughout 2023 and frame how those airlines navigate their operations throughout the year.