Southwest, American Predict Travel’s Tricky Road To Recovery

After almost a year of a steady drumbeat of disastrous results out of the industry as a whole, airlines are starting to show up with increasing bookings figures and a sunnier outlook on the future. Last week both Southwest and American Airlines joined the growing chorus on industry players reporting leisure bookings on the rise and plans to ramp up flights ahead of the key summer travel season.

“Thank goodness people are getting vaccinated and thank goodness people are ready to get back to their lives and move about the country,” Southwest CEO Gary Kelly said in an interview with CNBC’s “Squawk on the Street,’ following the airline’s Q1 financial release and a forecast by the airline that its cash burn, ongoing since last year, will finally come to a close in June after falling first $2 million to $4 million a day in Q2 2021, down from $13 million in the first three months of the year. On the whole, Southwest reported $116 million profit, boosted by more than $1 billion in federal payroll aid and announced plans to restore much of its flying capacity in the second quarter to about 85 percent of pre-pandemic levels.

“While the pandemic is not over, we believe the worst is behind us in terms of the severity of the negative impact on travel demand,” Chief Executive Officer Gary Kelly said in the statement. “We are experiencing steady weekly improvements in domestic leisure bookings, which began in mid-February 2021.”

Southwest competitor American reported it $1.25 billion in the first quarter when it also published its earnings today — representing its fifth quarterly loss in a row, but a narrower loss this time around than has become the norm as they, too, are seeing bookings pick up.

American Airline’s first-quarter revenue came in at just over $4 billion, down almost 53 percent from the more than $8.5 billion it posted a year earlier, per CNBC reports, though, like Southwest, increased demand is helping slow their cash inferno. Cash burn for American came in at $27 million a day in the first quarter but fell to $4 million in March. Adjusting for one-time items, American lost $4.32 a share, a penny more than analysts’ estimates.

“The pandemic is far from over. We have to continue to fight like never before and ensure that when the green flag drops, American is out in front,” American CEO Doug Parker and President Robert Isom said in a note to employees. “But as our world makes daily strides in COVID-19 vaccination efforts, customers are returning to travel and there is no doubt the pace of the recovery is accelerating.”

American is also planning to ramp up flying more than its big network competitors compared with their 2019 capacity.

“While we are more conservative about the near term. Being accurate means we burn less cash, which means we have more resources to invest in the recovery,” United CEO Scott Kirby noted on the airline’s quarterly call.

The renewed optimism in the airline industry is not limited to Southwest and American — Delta last week forecast break-even cash flow in the second quarter and a return to profit in the third, while United Airlines Holdings Inc. declined to venture a guess when recovery would happen, but did outline recovery plans on the assumption that it is coming. Additionally, United, Spirit and JetBlue Airways have resumed or plan to resume pilot hiring this year in anticipation of rising consumer demand.

Will that demand live up to expectations? That remains a difficult question to answer.

The travel industry closed the books in 2020 with $1.1 trillion in losses, a 42 percent contraction from the previous year, plunging to $1.5 trillion from $2.6 trillion, according to the U.S. Travel Association, citing data prepared by the research firm Tourism Economics. The industry dropped 5.6 million jobs in 2020 from its 16.7 million employed in 2019. Jobs lost in and around the travel industry accounted for 65 percent of all U.S. job losses during the pandemic.

“While the gradual progress of vaccinations has provided hope that a turnaround may be on the horizon, it is still unclear when travel demand will be able to fully rebound on its own,” said U.S. Travel Association President and CEO Roger Dow.

According to PYMNTS’ data — consumers do very much want to get back out there again though how likely they are to actually pursue that desire is very much tempered by vaccine availability and case count. Still, the will to get back out there on the road again, so to speak, is there. Domestic travel was second only to seeing friends and family again on the list of things consumers are eager to get back to doing more post-pandemic, beating out both eating at restaurants and going to events.

Consumer travel is a complicated space — and one largely dominated by business travelers as opposed to those traveling for leisure. Business travelers account for 12 percent of airlines’ passengers, but they are typically twice as profitable. In fact, on some flights, business passengers represent 75 percent of an airline’s revenues.

However, the forecasts for business travel are not optimistic — even as leisure travel begins to exert additional appeal to homebound consumers, according to American Express.

Month-on-month increases in spending on flights and restaurant meals domestically “indicate that the pent-up demand for consumer travel we’ve been talking about is real,” said chief executive Stephen Squeri, as Amex reported its latest earnings, according to the Financial Times. But spending remains low among international consumer and corporate customers — and they anticipate it will be for a while.

“We’ve been talking about 2023 before it gets back to 2019 levels,” Squeri told analysis on Amex’s latest earnings call.

And indeed, Amex’s latest prediction was born out in United Airline’s latest earrings call — during which the airline noted that long-haul international and corporate travel demand is still down about 80 percent compared with 2019 levels,

“The big question is when do those two things come back and we’re not certain of when that is,” Kirby said in an interview with CNBC’s “Squawk Box.” He said both segments would likely start recovering over the summer and through the second half of the year.

But that projection may be too optimistic — as those who were once business travelers had found new ways to conduct their business remotely with tools like Zoom and may be less enthusiastic about getting on the road again. Delta’s CEO has projected that business travel will be back to 70 percent of its pre-pandemic level by 2023. That other 30 percent might take far longer to recoup, he noted now that the definition of “necessary travel” has changed.

The good news is that leisure travel does seem to be making a comeback. Domestic leisure travel bookings to popular vacation destinations like beaches have surpassed 2019 levels, United CEO Scott Kirby told CNBC.

But international and corporate travel remain the big open question as one-time business travelers like Mark Frohnmayer, chief executive of Arcimoto, maker of a three-wheeled electric vehicle, are realizing that they may never need to get on the road again.

“The idea used to be that I have to fly across the country just for a half-hour lunch to get a business deal done. And then the finance industry found out you can have a face-to-face, and it can be a very personal discussion, remotely,” he told the Wall Street Journal.

And if it can run just as well remotely, airlines may have to learn a few new tricks to get T&E on the road again or a business model that relies less on the outsize revenue they throw off.

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