If it’s true what they say about a watched pot never boiling, maybe airline investors should lock their eyes on carriers’ daily booking data, the Transportation Security Agency’s daily airport security checkpoint counts, and any other statistics that would indicate how much the spread of the Delta variant of the coronavirus is impacting travel demand.
Alas, “what they say” is not true. Watched pots do eventually boil (it only seems like they don’t to the more impatient of us). And it’s too late, if you’re an investor in airline stocks or other securities, to dump your shares ahead of any impact from the Delta variant, which over the past couple of weeks has filled hospitals around the nation to the brim once again with Covid-19 patients.
Deaths resulting from the Delta variant strain of the virus, thankfully, are not rising anywhere close to the rate at which new cases are being reported. Nevertheless, it already has triggered a noticeable decline in air travel demand.
On Wednesday, Southwest Airlines disclosed in a Securities and Exchange Commission filing that it “has recently experienced a deceleration in close-in bookings and an increase in close-in trip cancellations… which are believed to be driven by the recent rise in COVID-19 cases associated with the Delta variant.”
The Dallas-based airline, which in normal times carries more domestic passengers than any other carrier, said that if that trend and the currently softening revenue trend for this month both continue into September, it will make earning an actual profit without the help of government aid in the third quarter much more difficult to achieve than previously expected.
Last month, upon reporting Southwest’s return to technical profitability for the first time since the fourth quarter of 2019 – before Covid-19 began cratering travel demand – company officials said they expected to be profitable again in the third quarter, which ends Oct. 31. Airlines are not scheduled to receive additional federal dollars in the third quarter.
While Southwest’s second-quarter profit was enabled by the federal aid it received, the carrier did earn an actual profit, excluding federal aid, in the month of July. And it previously was expecting to do the same in August and September. Now, however, achieving true profitability in both months is in doubt because of weakening demand blamed on the rise of the Delta variant.
Southwest’s Wednesday warning was based on internal data showing a drop in demand for travel over the next month that is greater than can be explained by the normal slowdown in travel demand as the peak summer travel seasons begins to wind down. Nor can that slowdown in travel demand be fully explained by the shift of the Labor Day holiday travel period entirely into September this year vs. 2019, when that holiday travel period was evenly split between August and September. Like other carriers, Southwest uses 2019 as the comparator period because of the extraordinarily weak business conditions in 2020 during the height of the pandemic.
So far, only one other airline, small deep discounter Frontier Airlines – has said publicly that bookings are being hurt by the spread of the Delta variant of Covid-19. Last week it said he now expects its August revenues to come in about 4 percentage points lower than its previous forecast thanks to the growing number of consumers being spooked by the Delta variant.
The daily tracking of the number of people cleared through the Transportation Security Administration’s airport checkpoints does not yet provide a clear indication of a decline in the number of people flying. But daily checkpoint clearance numbers don’t provide any insight into the travel planning and advance purchase activity of travel consumers, or into how many travelers might be canceling or deferring previously booked flights. Thus, since a large percentage of people flying this week are doing so on tickets purchased weeks in advance as part of their summer vacation plans, the actual number of people flying at the moment is not a reliable indicator of demand for travel more than a few days into the future.
Given Southwest’s leadership position in the U.S. domestic air travel market, it is very likely that the weakness in demand it is experiencing also is being felt now by all its competitors.
Southwest said it that it now expects its August operating revenues to be down 15% to 20% vs. August 2019, or roughly 3% worse than its previous expectation that its August revenues would be down only 12% to 17% from August 2019. Thus, it’s likely that revenues across the entire U.S. airline industry will be around 3% to 4% lower than what the carriers themselves — and the Wall Street analysts who track them — were expecting as recently as three weeks ago.
Those revenue and profit expectations could fall even further should the number of new Covid-19 cases continue to rise precipitously in the days ahead.
Airlines’ August results also are expected to be negatively impacted, albeit modestly, by the shift of the Labor Day holiday period this year entirely into September. In 2019 that holiday travel period was evenly split between August and September.
Average fare prices among U.S. carriers are up 19% from what they were a year ago, when carriers were desperate to get anyone to ride in their planes. But while that jump in the average price of fares seems huge, because the average price of fares were so low a year ago, even a big percentage increase doesn’t mean that fares have become unaffordable. For example, a flight from New York to London last year that sold for the remarkably low price of around $300 may well be priced 19% higher this year, but that mean it could be bought for the still relatively modest price of $357. And with demand now weakening in response to the Delta variant’s rapid spread, there’s likely little chance that airlines will be increasing their fare prices in the short term.
It’s that combination of weakening demand and still relatively low average fare prices that are continuing to dog airlines’ ability to earn actual profits from their operations.
Despite the concern registered officially by Southwest U.S. carriers stock prices up modestly in Wednesday trading. Southwest closed at $51.84 a share, up 1.4%. American’ shares closed at $21.23, also up 1.4%. United stock closed at $84.21, up 1.1%. Delta was up 2% at $41.30 a share. Frontier, despite its earlier warning, closed Wednesday at $15.52, up 4.44%. And Spirit Airlines shares gained1.1% to close at $26.20.
The American and Spirit stock price gains, while small, are notable in that both carriers were pummeled by the media and consumers much of last week because of widespread delays and flight cancellations that they blamed on a combination of bad weather, technical problems and a nagging shortage of flight crews. Carriers still are reporting deep backlogs of pilots awaiting required re-training after being recalled to duty in the past three months. Carriers did not officially layoff many pilots during the height of the pandemic, thanks to government financial aid that was meant to keep excess employees on the payroll. Still, thousands of them did not fly during that period and, as a result, require retraining before they can fly again.