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New International Travel Advisory Puts Airlines’ Hopes For Summer Rebound At Risk

New International Travel Advisory Puts Airlines’ Hopes For Summer Rebound At Risk

Strong retail sales data from March helped underscore a sense of surging consumer demand in the US, driven in no small part by stimulus and enhanced benefits…

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New International Travel Advisory Puts Airlines' Hopes For Summer Rebound At Risk

Strong retail sales data from March helped underscore a sense of surging consumer demand in the US, driven in no small part by stimulus and enhanced benefits for the unemployed and under-employed, coupled with loans to businesses that have filtered through to their vendors and employees. With all this money sloshing around, it's hardly surprising that Americans have shown their eagerness to travel after more than a year of being cooped up at home, as travel rates spiked during the Spring Break travel season.

But as air traffic rates move lower again off their recent peak, the State Department created more anxiety for airlines and investors by announcing another wave of COVID inspired travel advisories that will encourage Americans to avoid travel to 80% of the world.

With the US maintaining restrictions on cruises, domestic air traffic, along with travel to a handful of nearby foreign destinations like Mexico, is pretty much the only game in town for airlines. American Airlines announced yesterday that they're bringing all pilots back to full time duty and even - for the first time since the pandemic - hiring new pilots for the first time.

But as Bloomberg pointed out, the rebound could lead to pitfalls: while discounters like Spirit Airlines and Frontier stand to benefit, those gains could come at the expense of big carriers who are more reliant on high-margin international flights.

"Intrinsically, domestic flying does not make a profit," said John Grant, chief analyst at OAG. "It is a lot more marginal than international flying where you've got lots of business travelers in business class paying expensive fares."

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"If you’re a US airline, you’ve been able to recover some of that lost international demand by people being attracted to go to the southern states, to points like Florida, or Arizona or if they could do California," OAG’s Grant said. While there are positive signs, "it still requires access to major international markets to solidify the recovery we've seen today."

With travel rates already declining in the US following the spring break and Easter travel season...

Source: Bloomberg

...industry analysts are now looking toward the summer to see whether the rebound in travel will be enough to justify airlines' current lofty (relative to history) valuations

Even as the airlines tout their expanded flight schedules, investors are growing uneasy about the recovery’s strength. A Standard & Poor’s index of the five biggest US carriers is in the midst of a 10-day losing streak, the longest on record going back to 1989.

Source: Bloomberg

And as traffic in states with big domestic hubs (like Texas, Florida, Illinois and Georgia) declines as airlines miss out on the high-paying first-class international travelers headed to London or Tokyo - US airlines are left to focus on how to entice more budget-conscious leisure travelers.

Other international markets like India and Brazil remain out of reach and raging infections.

Some major airlines are getting creative. For example, in an attempt to re-energize its international business, United is trying to tap Americans’ pent-up wanderlust with new seasonal flights to Iceland, Greece and Croatia. American, which is cutting back flights to South America, has been bolstering the domestic schedule - for example, with service to Orlando, Florida, from eight US cities this summer.

Source: Bloomberg

US airlines aren't the only ones suffering from the drop in international travel. European tourism hotspots like Spain and Greece are bracing for yet another slow summer season, and some Spanish towns are rebelling against restrictive outdoor mask mandates that might ward off paying customers.

Airlines are also beefing up another popular domestic route from New York to Miami and Ft Lauderdale. That will come in handy as rising taxes in New York and New Jersey - along with the sunny weather and alluring nightlife - drive more hedge funders and other financial industry high rollers to book a flight down south.

Tyler Durden Wed, 04/21/2021 - 20:00

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