CAPA Outlook: State of the Industry April 2023

Transcript

Lori Ranson:So good morning. Thank you for being here. So I flew into Ontario yesterday on Frontier, which has been growing here at a pretty, pretty steady clip. And while I was not on Shelley, I had a smooth trip from DCA through Denver. When I was thinking about what I was going to talk about here, one thought kept popping up in my brain, and that's that things look really good at the moment, but there are also a lot of unknowns as we move forward. This is index traffic by region for the end of last year and early this year compared with 2018 and 2019, and it just shows how demand continues to grow. Asia was lagging at the beginning of the year, but the recovery in the region is going to accelerate. And you can see that in the latest IATA figures that show Asia-Pacific traffic was down about 26% in February compared with 2019, which is actually a pretty decent improvement. This shows North American system capacity through mid-September, and it's pretty much trending in line with pre-crisis levels. It's tilting towards international markets, and international capacity is going to surpass 2019 levels starting in May, as demand is really strong for the high season. This is flight cycles for the US Big 4, and from January of this year, American has been operating more flights than the equivalent month of 2019, and the flights have tracked very closely to 2019 numbers since that time. Delta has yet to operate the same number of flights compared to the same month in 2019, but they're operating in the upper 90% range. Southwest has been operating at over 100% since August, and that's due to their domestic strength. There was a dip in September due to the operational issues. United surpassed 100% of its flights at the start of the 4th quarter and has remained above that number. So this is flight cycles for what we call the Mid-4. Frontier and Spirit were the first to recover, but their fleets have also grown. And just as an example, Spirit's fleet is about 45% larger than 2019, and Frontier's fleet has also expanded. JetBlue is moving closer to pre-crisis levels with a slightly enlarged fleet, and Alaska got close earlier this year. Thank you. This just shows good pricing traction for the 4 largest U.S. airlines for the first 2 months of this year, year on year, and international prices reflect those trends. You know, generally it seems revenues remain strong for all U.S. carriers, but that still sort of reflects post-pandemic historical highs. It's probably worth watching how demand holds up later this year, particularly in the 4th quarter, especially if the economy weakens. You can see capacity in Latin America has bounced back quicker than most regions. Both Colombia and Mexico reached their pre-pandemic capacity levels by early 2021, and IATA's data for February show that traffic was down just about 9% compared to 2019. At the moment, there's some upheaval in Colombia as 2 of its ULCCs have ceased operations. But generally demand remains steady. Fuel costs and currency fluctuations remain challenging for Latin carriers, and IATA is projecting a loss of about $795 million for Latin operators this year. So Asia capacity continues its recovery, building steadily throughout the year. A lot of Asia-Pacific airlines are focused on restoring service to China this year, and there's also been some consolidation in the region. Korean is taking over Asiana, and Air India and Vistara are merging. Seems like US carriers are taking a pretty cautious approach to how they're rebuilding service to Asia-Pacific. United ultimately sees a bounce back in demand to Beijing and Shanghai, as well as Hong Kong, but also notes that Russian airspace restrictions will constrain flights to China and India this year. There are also some nuances in the rebound in Japan-US traffic driven by currency devaluation and Japan's government incentivizing domestic travel. Europe's scheduled system capacity is growing. It's still down compared with 2019 due to labor and supply chain challenges, but that does create upside for yields and IATA's forecasting a return to profitability for the region this year. There's also some consolidation happening in Europe. Lufthansa's taking a minority stake in ITA, and IGA is moving forward to purchase Air Europa. Air France has said that some small airlines want to partner with or possibly be acquired by another larger airline group. Thank you, Lori. This shows Airbus and Boeing deliveries for the first quarter, still down versus pre-crisis levels. Supply chain bottlenecks continue to be a big challenge for all operators, and it seems like there won't be any relief until maybe the middle of next year at the earliest. Airlines worldwide are either looking for temporary aircraft fixes or adjusting their capacity to reflect those challenges. And you all are aware that here in the U.S., airlines are facing some system constraints with ATC staffing in New York and Florida, with big operators in New York being asked to adjust their schedule for the summer. This is a slide from A4A from a couple of months ago just showing some changes in day-of-week travel patterns, which we know is largely driven by remote work. And that's resulting in shifts in corporate travel mix, even as business traffic is still in its recovery mode. Something I found really interesting is a few months ago, American said roughly 45% of its revenue is a blend of business and leisure, 30% is leisure, and 25% stems from purely business trips. It also said about 2/3 to 3/4 of its managed corporate contracts are not fulfilling those terms. Basically explaining if a company is struggling to bring people back into the office, it's tough to convince them to take a day trip to New York or Chicago. So for American, same-day business trips were about 3 to 4% of its traffic pre-pandemic and now represent about 1% of its traffic. It's tough to say if this is a permanent shift in travel patterns. More companies are mandating employees need to be in the office a bit more often, So the hybrid environment could change. And I think a lot of airlines are trying to figure out the new normal, especially in lower demand months of January and February when they would typically rely on corporate demand. And it seems more pronounced right now just because corporate traffic isn't fully recovered. This is a chart from IATA showing Brent crude and crack spread prices. At the end of '22, IATA expected oil prices to fall this year, and while jet fuel crack spread is forecasted to narrow somewhat, it's going to remain above its long-term historical average, which we know is going to create some friction for airlines. And that's one of the reasons Delta bought a refinery many, many years ago. So that's just a brief overview of where we stand today. Thank you a lot for your time and enjoy the conference.

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