Short-Term Thinking and Airlines

As of writing this article, consumer spending has shifted from goods to services. After being confined to their homes, Americans are spending on long-delayed vacations, weddings, etc. The shift has caused demand to increase for hotels, car rentals, and airlines. All of these industries are working to build back staff headcount, since purging in 2020. 

Cancellations are a plague for the airline industry, a result of poor planning and short-term thinking. There is a massive shortage of staff and pilots, causing delays and cancellations during peak summer travel. 

To maximize the number of routes, airlines have allowed very little margin for error. Scheduling is so tight, where a single cancellation can create a domino effect of missed connections and more delays. The problem is traditional flight scheduling is assumed to work in a post-pandemic world. 

In response, airlines are reducing the number of routes to build some level of cushion to account for staffing issues. (Months after a string of delays and cancellations) 

Running an airline with sky-high ticket prices should be a slam dunk in terms of profitability and stock prices. To my surprise, the ETF tracking airlines is down 24% through mid-June 2022. They have a way to go before reaching their pre-pandemic highs. 

How much in oil futures were bought during 2020?

Unfortunately, United, American, and Delta Airlines did not hedge their fuel when the cost was much lower. Most companies in the transportation industry are involved with some level of hedging, keeping fuel costs predictable through futures contracts. By locking in the price now for the next 12 months, an airline can ensure stable fuel prices as part of their operations. 

Hedges can sometimes work against the airlines. Pre Covid, airlines who locked in contractually had to pay a higher cost on their commitments, only to see oil drop into negative territory. But once oil drops, it would be prudent to load up on futures to lock in low prices. 

As jet fuel costs go up, the unhedged airlines can either choose to pass along the costs or eat some it. It looks like we’re seeing both. 

What did the airlines do with the bailout money?

After receiving over $54 billion in federal aid, airlines offered early retirement and instituted layoffs to save money on cratered demand. Not to be a defender of airline CEOs but the lockdowns were open-ended and what were airlines going to do with the majority of staff when flights were grounded? The current pain wasn’t totally self-inflicted, but the aid designed to carry the industry through seemed to have been squandered. 

About 400,000 airline workers lost their jobs during the pandemic. People weren’t traveling during lockdowns, and even with government support, the airlines did not have enough demand to support the amount of staffing. 

The airlines spent 96% of their cash flows on stock buybacks from 2014-2020. No wonder they were so short on cash. That money could’ve been used for retention purposes, but here we are. 

What are the requirements to becoming a pilot?

It takes more than two years, $92k in tuition, and 1500 hours to pass all of the required pilot training. Some airlines offer tuition reimbursement but most fall short of covering a majority of pilot training costs. 

The US requirement of 1500 hours is the highest in the world. Previously, it was 250 hours until 2009 when a pilot error caused a crash, prompting the massive increase in required air hours. Military pilots undertake 750 hours.

What now?

The rush of travelers needs to slow down. Even with high ticket prices, the industry is experiencing sky-high demand. As we watch the economy slow down, we will have to see how this impacts travel volume. 

Pilots, pilots, pilots. Planes can’t fly without two qualified pilots. The industry has significant recruiting to complete before routes can be added. 

Disclosures:

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.