Specialist
Former airline executive
Agenda
- Supply-side capacity discipline, cost pressures and labour update, focusing on core drivers and potential solutions to personnel constraints
- H2 2022 and 2023 demand expectations – pricing power, margin impacts and resulting capacity dynamics among regionals vs majors
- Assessment of major carriers, LCCs (low-cost carriers), ULCCs (ultra-low-cost carriers) and potential implications of Spirit Airlines' (NYSE: SAVE) merger offers from Frontier Airlines (NASDAQ: ULCC) and JetBlue (NASDAQ: JBLU)
- Implications of recession or softening demand on US carriers
Questions
1.
We’ve seen a lot of trends and shifts in the airline industry across the last two years. What structural changes has the pandemic driven? Which trends do you expect to stick as we return to normalcy, and which might be left behind?
2.
Are there any other meaningful trends or changes occurring in aviation, as someone who’s spent over 40 years around this industry? Do you have any other stats or hard facts about the way the industry is changing?
3.
What are the core drivers of the labour shortages at airlines? Everyone has heard a lot about pilot shortages, maintenance shortages, ground handling, and I know there were a lot of forced retirements at the onset of the pandemic, alongside furloughs.
4.
Why are airlines experiencing such outsized constraints on labour, outside the impacts of coronavirus, forced retirements, furloughs and people being slower to return to the workforce? Is it particular to working at an airline?
5.
What solutions will airlines deploy to combat the labour shortages, outside of difficult-to-forecast solutions such as a government change to the 1,500-hour rule for pilots? Is the solution wage inflation or efforts such as sponsoring the training required to become a pilot? What else can be done?
6.
What annual wage inflation would you expect across the board, differentiating by pilot and maintenance or however you see fit?
7.
Could you outline the first- and second-order impacts of the capacity dynamic? I hear a lot about regionals being disproportionately affected by issues such as the pilot shortage, as pilots get pulled away from regionals and LCCs [low-cost carriers] to major carriers who pay more. We’ve also seen regionals exit markets and reduce capacity generally. What are the lesser-appreciated impacts of less regional capacity, and how does that flow through to major carriers?
8.
You indicated regional carriers comprise 30% of domestic departures – I believe they were 43% pre-pandemic. What are the implications of that downwards trend for airlines? How will that also affect other carriers outside of regionals, and consumers alike?
9.
Could you quantify how expensive turnover is at a pilot level?
10.
You noted the importance both ways for regionals and majors, and the way they depend on each other. We’re seeing regionals exiting markets, having fewer pilots and less capacity. Do you expect major carriers to send bigger aircraft to serve the markets that regionals are exiting?
11.
To confirm – you’re saying that regional markets having less capacity favours the LCCs or anybody else who goes secondary-to-secondary?
12.
Fuel and wages are the highest cost components for airlines, as you referenced. What levers would carriers have available to pull down and control costs amid mounting pressures and a hypothetical scenario in which demand wanes?
13.
How can we estimate the point at which demand destruction may occur? Airlines are posting revenue growth while capacity remains below 2019 levels, which shows their pricing power. At what point might that pricing power wane or might demand destruction become more likely? Is there a certain ratio you use? As an example, could we use something such as air fares breaking a 2:1 ratio vs a comparable such as train travel?
14.
How does pricing power differ among carriers? Is any carrier or group of carriers – such as majors vs LCCs – better able to pass on cost to customers? If so, why?
15.
LCCs and ULCCs [ultra-low-cost carriers] were expanding their capacity rapidly pre-pandemic. They’ve also started to add capacity while other major carriers are still sitting below 2019 levels. How do you expect a larger footprint of LCCs compared to 2019 – paired with the recent demand trends – to impact major carriers?
16.
Do you expect margin compression for major carriers for the next few years? You indicated it will be fairly significant that consumers will be more cost-conscious and favour LCCs, and we’ve already discussed the cost pressures from both labour and fuel.
17.
What are your thoughts on Spirit Airlines’ potential deal with either Frontier Airlines or JetBlue Airways? How should we frame the impact on the rest of the industry in each scenario?
18.
Would any one US carrier be more vulnerable or exposed to a Spirit-JetBlue or a Spirit-Frontier merger, regardless of which pairing it is? Who would most likely have their market share pressured or specific routes displaced by the entity?
19.
Does either Frontier or JetBlue make more sense to you as a pairing for Spirit?
20.
What are your expectations for Avelo and Breeze, the newer players in the ULCC arena? Who has a stronger market presence, who are they likely to disrupt and how will their evolution likely take shape?
21.
Why will the models employed by Avelo and Breeze work today, to play devil’s advocate? The secondary-to-secondary market opportunity has existed for quite some time. Why hasn’t this model been employed earlier if there is such an optimistic outlook?
22.
What are the most important questions investors should be asking management teams across players such as American, Delta, Spirit or Frontier?
23.
How would airlines be affected in the context of a recession? What would you expect across top-end, bottom-line and respective impacts to major and network carriers vs LCCs vs regionals?
24.
What do people outside the industry commonly misunderstand or underappreciate about airlines?
