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Southwest is optimistic for 2022, despite ongoing staffing shortages and pandemic pitfalls.
Will the latest twist in the coronavirus pandemic hamper the recent gains made by the airline industry?
The U.S. airlines had high hopes for an industry recovery in 2021. On the heels of last year, one of the worst in aviation history—the coronavirus pandemic having emptied airports and tanked airline balance sheets—the rollout of COVID-19 vaccines early this year sparked bullish predictions of a “boom” in air travel and a return to profitability.
But then came the Delta variant and now, the fast-spreading Omicron version. International entry rules are tightening and some countries are experiencing yet another wave of COVID infections. So, what does this latest hurdle mean for the airlines—and are there any bright spots for 2022?
The answer to the latter is a qualified “yes,” based on a slew of financial reports from major airlines in the past few days. “The results of the fourth quarter are better than the airlines expected,” says Henry Harteveldt, travel industry analyst and cofounder of Atmosphere Research. Travel volume is up, especially for holiday travel in North America (and despite Omicron), flights are full, and airlines are succeeding in “upselling” customers to pay more for more generous legroom or baggage allowance, he adds.
Delta Air Lines, for example, on Thursday said it now foresees an adjusted profit of approximately $200 million in the final quarter of this year; that’s after an earlier prediction of a “modest” loss in the period due to rising fuel prices—typically the single largest expense for airlines aside from labor. But fuel prices have since eased and, simultaneously, demand for airline tickets rose. The airline had earlier reported a $1.2 billion profit for the third quarter.
Other major U.S. carriers, like American Airlines and United Airlines, also were in the black in the third quarter of 2021, but some of that was due to ongoing federal pandemic aid. As airlines turn the corner into 2022, however, they won’t be able to depend on help from Uncle Sam anymore (the pandemic program has ended).
The recovery, such as it is, is primarily based on strong domestic traffic and to nearby destinations in Canada, Mexico, and the Caribbean. “Long-distance international travel is the main uncertainty,” says Harteveldt, especially given rapidly changing rules for U.S. visitors to many popular destinations in Europe.
For that reason, the mostly domestic carrier Southwest Airlines is one of the clear winners heading into next year. It has consistently made money—a rarity in the industry—logging 47 consecutive years of profitability up through 2019. It now expects to be profitable again in the fourth quarter of 2021.
However, the picture isn’t entirely rosy there either: Southwest said in an investor presentation that it expects 2022 to be “a choppy, transition year,” in which capacity will be flat, at most about 2 percent above last year, and fluctuating fuel prices will be another wild card.
Still, as outgoing Southwest CEO Gary Kelly told AFAR at a recent Wings Club event in New York City, “We’re very optimistic about next year,” so much so that the carrier expects to take delivery of more than 100 new aircraft in 2022 alone (in part to retire older, less efficient planes). The airline has kept costs low by operating Boeing 737 planes exclusively and by offering few frills, single-class service, and quick airport turnarounds.
“They’re the mother of all low-cost carriers,” says Michael Derchin, a long-time Wall Street airline analyst who pens the “Heard in the Hangar” newsletter. He notes that the airline’s contrarian policies—no fees for checked baggage or changing your ticket (Southwest had no change fees long before it became a pandemic trend to ditch them)—have won it a loyal following. The airline even added 18 new airports to its roster this year and expanded its flight network from the U.S. mainland to include Hawai‘i.
The biggest uncertainty for the industry as a whole is what will happen in what’s traditionally been the biggest drivers of airline profits—business travel and premium-class traffic on long-distance flights.
“The main impact will be in long haul-travel to Europe,” Harteveldt predicts. Transatlantic travel “has seen demand fall precipitously because there are a lot more restrictions being imposed” due to the rapid spread of Omicron, among other factors, and it’s already showed up in a drop in advance bookings for the first half of next year.
Airline trade groups are also adding a cautionary note to their forecasts for the coming year. In an industry webinar earlier this week, International Air Transport Association (IATA) chief Willie Walsh said that the flurry of new travel restrictions in response to Omicron will likely put the brakes on demand for international flights over the coming months, although it’s too early to tell how severe the impact will be. And in a new report on the impact of COVID-19 on the industry, domestic airline association Airlines for America reported that last month international travel from the United States was still down 41 percent below November 2019 levels.
The association also noted that airline fleet capacity is about 7 percent below where it was before the pandemic, and that “a return to 2019 levels depends in large part on the return of business travel,” a prospect that’s far from certain.
Meanwhile, U.S. airlines are also struggling with the same issues plaguing many of the country’s employers. Staffing shortages have affected airport services ranging from baggage handling to customer service jobs. Southwest’s Kelly said that the labor shortage on top of the never-ending pandemic is the biggest hurdle to the airlines’ plans to restore capacity to pre-COVID levels next year.
On the positive side for consumers, however, the Airlines for America report noted that “average airfares remain lower than prepandemic levels,” and in the second quarter of this year prices were down 36 percent from the same period two years ago.
And for the airlines, there is one unexpected benefit from the latest spike in COVID cases, says Harteveldt. “Because of Omicron, we’re seeing more and more people get vaccinated now.” And that, more than anything, will be the key to a sustained recovery in airline travel.
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