CAPA State of the Industry

Transcript

Lori Ranson:Good morning, everyone. Thank you for being here. No dancing from me yet, but I will give you a brief overview of how we see things shaping up in the Americas. So a strong recovery is underway, but challenges are definitely mounting. Jet fuel prices, inflation is at historical highs hovering around 8%. Airlines are facing pilot shortages and training bottlenecks. A lot of airlines are also in pilot negotiations in the US. This is an issue that's not going to go away anytime soon. There's also a risk of higher airfares that could temper demand. Right now, airlines have a really positive outlook for the second quarter. This is just some commentary from United and Azul. So United's total unit revenue is now projected to grow around 23 to 25% for the quarter. That's up from a previous estimate of 17%. Even at the 17% level, its CEO said demand is stronger than he's ever seen in his career, and he's been around a while. So it's the same situation for Azul. Record unit revenue in the second quarter, driven by an acceleration of corporate demand, record bookings, and overall strong demand. This is a chart from Airlines for America, and it shows ticketed passengers for the week ending May 7th, 9% fewer than 2019. Domestics down about 10%, internationals down about 6%. The interesting thing about international is it shows that more and more people are feeling comfortable traveling on long-haul routes as markets open up. That inflection point in March was largely driven by U.S. airlines having record bookings for that month. Several said we had historical high bookings. So it's off the high, it's still moving in the right direction, but we'll see how airfares make those trend lines change. This is a really interesting chart, also from A4A. So it shows the top 20 U.S. country pairs from the U.S. and change in passengers April of this year versus April 2019. And you'll see that Mexico, the Dominican Republic, and Colombia all posted increases. And that's driven by the fact that During the last couple years, most US passengers felt more comfortable taking short-haul international trips. But demand between North America and Latin America is recovering solidly. This is some data from CAPA that just shows seats are down about 0.5% in early July compared with 2019. So really solid growth, doesn't show any signs of slowing down. I want to take you just through some trends we see in various countries here in the Americas. So US seats will probably reach 2019 levels in the 4th quarter. Carriers are kind of working to keep their capacity under control so they can keep airfares high to recoup fuel costs. They're also building some padding into their schedules so they can preserve operational integrity for the summer period. Canada's seats are down about 21%, but they're building back up solidly throughout the rest of the year. You can see now that travel restrictions had eased. Colombia bounced back really quickly. Seats are now 18% above pre-pandemic levels. Same case with Mexico. Its seats reached 2019 levels at the end of last year. Really solid growth this year driven by the country's low-cost, ultra-low-cost carriers Volaris and Viva Aerobus. Brazil is also recovering at a solid rate. It seems like Brazil's airlines are exhibiting some capacity discipline as leisure gets back to pre-pandemic levels so they can boost their yields up. And just turning briefly to the transatlantic market, airlines are predicting a really strong summer. And the market seats are going to be down between North America and Western Europe about 15% from 2019 in late June. It will take a while for this market to recover fully because of corporate demand, and long-haul corporate demand is going to recover slow— more slow than domestic demand, corporate demand. But the interesting thing is, is we've heard lately some airlines mention that they're seeing positive trends in the corporate market on transatlantic routes. So something to watch out for between now and the remainder of the year. But all of this obviously is against a backdrop of record fuel prices, and this is from A4A. The record in 2Q is higher than the record that the industry experienced in 2008. And this year oil prices could add about $115 billion to airline costs. in 2022. It's worth noting that when United revised its unit revenue forecast upwards, it also revised its fuel cost per gallon forecast upwards, 17% higher versus a few weeks ago. Airlines feel pretty comfortable that they can absorb that cost by pushing fares higher. This is part of an article from one of my colleagues at Aviation Week, just showing that airfares in April grew 18.6% month on month, and on an annual basis they were up 33% from a year ago, which is the largest yearly gain since 1980. And I think one question that we have to ask is, when will consumers push back and say the cost is just too prohibitive? And I think that's something that could possibly happen after the busy summer season in the Americas. So watch out for that. And if airlines are forced to cut their capacity a bit more, they're gonna experience some pressure on non-fuel unit cost. So obviously we have to talk about the pilot issue. It's a big issue in the US. It's not going anywhere anytime soon. Just to recap, the industry lost about 10,000 pilots over the last couple years. hiring 13,000 this year, which is the highest annual hiring rate probably since 2000. And so you've got a lot of— you've got a range of issues happening here. The RAA, Regional Airline Association, has estimated that about 15% of pilots, about 49,000, will reach retirement age in the next 15 years, another 6%, about 14,000 over the next 6 years. So when you talk about pilot shortage or pilot staffing, there are a lot of issues that come into play. It's recruitment, it's retention, it's attrition, it's training, and it's training bottlenecks. And I think what you see is a trickle-down effect, and that effect is a loss of air service. The RAA has estimated that about 108 cities have lost about more than 25% of air service first quarter of 2019 compared to the first quarter of 2022. It's an issue that's not going anywhere, and there's been some discussion about changing the 1,500-hour rule in the US. I don't see a lot of industry unity around that issue. There's also been discussion about changing the retirement age to 67 from 65, but some US pilot groups have pointed out that ICAO's international age limit is 65, so those older pilots would have to bid for domestic routes, which would push more junior pilots out. Right. That could create some training obstacles and some training costs. I mean, this is all sort of just a way to wrap up and say this is a tough issue that the industry faces and there are no easy answers. I wanna move on to aircraft availability because there's gonna be some issues over the next few years. If you don't have a steady order book for deliveries between now and the middle of the decade, you could find yourself in a challenging situation. So airframers are working to push up their production rates, but they face the same issues that everyone else faces in terms of supply chain and labor shortages. So it's an issue to watch out for, for the next few years. I just want to touch on the amount of debt that A4A airlines had taken on over the last couple years during the pandemic. And what stands out to me is the expense of that debt, which is gonna settle around $5 billion over the next couple years. I mean, airlines are aware that they need to delever, and I think that the problem that they face is trying to determine optimal amounts of cash for their balance sheet. And once that happens, they can sort of forge delevering plans. But the issue is, How do you determine what the optimal amount of cash is after the last two years? It's pretty tough. I just want to end by touching on consolidation because it's afoot in the U.S. and Latin America, and if these deals do emerge and whatever form they take, I believe the question that you need to ask is: Are these companies rewriting the final chapters? Of consolidation here in the Americas. And that's gonna be an interesting question to answer over the next 5 to 10 years. I— so I think that we're in good shape in the Americas. There's some challenges that are ahead, but this industry is not unfamiliar with challenges in the least. So I just wanna leave on a note and tell you that it's a pleasure to be up here talking about how the region is recovering rather than just surviving. So thanks a lot for your time this morning and enjoy the conference. Thank you.

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