US value airlines look for inflection point, but uncertainty abounds
US value airlines are joining their larger counterparts in believing an inflection point in demand could occur in the back half of 2021 as vaccine distribution and administration becomes more widespread.
Alaska is declaring that it will be moving towards a sizeable restoration of 2019 capacity by the US summer travel season, while JetBlue and Southwest have not offered any projections for that same period. A potential added layer of uncertainty is emerging as reportedly the US government is considering requiring COVID-19 testing for domestic air travel.
For now, those airlines are attempting to drive passenger volume through stimulation, and that scenario is not likely to change anytime soon as pandemic challenges continue to blunt demand in 1Q2021.
- Alaska Air believes health patterns in the US could improve in the next couple of months, which could help to jumpstart demand.
- Southwest and JetBlue also hope to see an inflection point in demand later in 2021, but the possibility that there will be testing for US domestic passengers could add another layer of uncertainty into the recovery.
- Those airlines are continuing their efforts to stimulate demand through what will be a tough 1Q2021.
For Alaska Air Group there are some positive signs emerging, after a tough 1Q2021
Alaska executives recently explained that average daily bookings from December to January had increased by 20%, to 58,000, and there have been several days with bookings exceeding 70,000.
And while customers are demonstrating interest in future travel, “Alaska’s enplanements today remain stalled at 35% of normal levels, or about 40,000 passengers per day”, said Alaska's incoming CEO Ben Minicucci.
But Alaska expects “health patterns to improve in the next two months, and that restrictions will begin to relax”, said Mr Minicucci.
After reporting a USD3.8 million daily cash burn in Q4, Alaska is joining other operators in pivoting away from that metric. The company plans to report quarterly operating cash flow estimates, and for Q1, Alaska estimates cash flow of flat to minus USD100 million, which includes funds from the US government’s Payroll Support Program (PSP).
Southwest braces for a rough Jan- and Feb-2021 and keeps a tempered outlook
Southwest Airlines also hopes for improved demand later in 2021, but has a conservative view for the immediate future.
The airline expects operating revenue to drop 65% to 70% in Jan-2021, with load factors of 50% to 55%. For Feb-2021, the airline expects revenues to drop by 65% to 75%, with loads again in the 50% to 55% range.
The airline has stated that its operating revenues need to reach approximately 60% to 70% in order to reach cash break-even. Southwest’s average core cash burn in Q4 was USD12 million per day. A seasonally weaker travel period in Jan-2021 and Feb-2021, along with rising fuel prices, will drive that metric higher in 1Q2021, to USD17 million per day.
Southwest CEO Gary Kelly said that there needs to be a surge in revenues for the airline to reach a break-even cash performance.
“There’s a balancing act here, and we’re balancing a desire to conserve cash and minimize our losses, which requires that we operate a reduced schedule[,] as compared to the need and ability to achieve breakeven by generating more traffic”, said Mr Kelly. “And we can only do that by offering more flights.”
JetBlue also hopes for an inflection, but potential new testing creates uncertainty
Like Alaska Airlines, JetBlue is working to turn investor attention away from cash burn, after its average daily burn in 4Q2020 was USD6.7 million. The airline now plans to start offering EBITDA (earnings before interest, taxes, depreciation and amortisation) guidance. The company projects its EBITDA for 1Q2021 will fall between negative USD525 million and negative USD625 million.
JetBlue expects its 1Q2021 revenue to fall by 65% to 70%, compared with the same period in 2019.
“We believe that we will begin to see material revenue recovery when there is a meaningful and sustained decrease in COVID case counts”, said JetBlue president Joanna Geraghty. “We also believe that governments will adjust travel restrictions with decreasing case counts, further fueling demand”, she stated.
But at the moment, restrictions could further tighten. The administration of the new US President Joe Biden is considering a requirement for COVID-19 testing for domestic air travel.
That may or may not materialise, but unsurprisingly, the industry is not welcoming such a measure. Ms Geraghty highlighted concerns about testing capacity in the US. “In many parts of the country, testing slots are scarce”, and in many cases it can take days to obtain test results, she said.
Ms Geraghty also pointed to US travel and tourism research showing that testing domestic air passengers would increase the number of people introduced into the testing framework by 42% on a daily basis.
“We have a real concern about this. We are open to reasonable measures, but we don’t believe a domestic testing regime is feasible[,] given the existing framework,” Ms Geraghty concluded.
US value airlines focus on working to drive volume through stimulation
Alaska, JetBlue and Southwest believe that driving passenger volume through pricing stimulation will be an important factor in the recovery from the COVID-19 pandemic.
“Volume is what’s going to bring our revenue back for now, and then we’re going to worry about yield later on”, said Alaska chief commercial officer Andrew Harrison.
Noting that JetBlue has engaged in a lot of fare promotions, “We’ve been really focused in the past months on volume and getting customers onboard…and I expect in the coming weeks and months, we’ll be quite focused on…volume”, said company VP of sales and revenue management David Clark.
Executives at Southwest recently stated that the airline had had more promotional activity than usual, including a recent air sale that included travel in Mar-2021 and Apr-2021. The company’s president, Thomas Nealon, said that running promotions in January was unusual for Southwest.
“But that’s where we are[,] and the goal is simple", Mr Nealon said. “We need to stimulate travel. We need to get more bookings in place.”
US airlines brace for continued uncertainty in early 2021, and possibly beyond
The majority of US airlines are looking for positive changes in currently stalled demand in the back half of 2021. But with new variants of COVID-19 spreading and restrictions tightening worldwide, the onset of a solid recovery in demand could happen later than those operators are anticipating.
In fact, the only certainty that remains is that a level of unpredictability will remain in place for the next couple of months, and possibly beyond.