November 5, 2021
I’d been up packing since 4:45 a.m…
My family and I had flown to Miami to celebrate New Year’s Eve with our friends. We needed to make a 7 a.m. flight home to the NYC area so we could hop in the car and drive to White Mountains in New Hampshire to celebrate my father’s 80th birthday that same evening. (I’m exhausted just reading that!)
Then I got a dreaded text message from American Airlines.
Just as we were dragging our luggage out of our hotel room, with three young (and very sleepy) kids in tow, American Airlines informed us that they had rebooked our flight… for the next day.
What?! How would we find a hotel room in Miami for an extra night during a holiday weekend? And most importantly, what about my father’s birthday party I was racing to get to?
The icing on the cake was the airline ticketed us not home to New York City… but rather Washington, DC. And then there was a layover, and eventually a shuttle to NY.
Who does that? American Airlines, it seems.
But here’s the kicker… This all happened pre-COVID. So, when I saw the headlines last weekend about American Airlines cancelling nearly 2,000 flights, I wasn’t surprised.
Now, this isn’t an essay today bashing American Airlines… I suspect we all have had travel disaster stories we could share, involving many different companies (and I encourage you to write in with yours to [email protected]).
Many thought the COVID-19 pandemic would kill the airline industry… grounding travel across the globe as everyone locked down in their homes.
And while travel is certainly more in favor now than it was this time last year, the tide is going out on this sector. And airline companies that don’t take care of their customers aren’t going to make it.
This industry is still worthy of investment, but… you must do your research to find the solid stalwarts in a sea of dying businesses.
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According to the International Civil Aviation Organization, global passenger traffic has plummeted almost 50% since 2019.
Fewer passengers have driven down ticket prices… From the first quarter of 2019 to the first quarter of 2021, domestic round-trip airfare fell more than 30%.
The airlines can’t turn a profit… In 2020, U.S. airlines lost around $35 billion collectively. And although the industry has improved since, it’s still operating with big losses. In the first half of 2021, U.S. airlines lost $4.3 billion.
Couple this with the airline’s ongoing staffing issues, and it’s a mess…
Take the long lines are airports this past weekend… It wasn’t a holiday. It was just another random weekend in which cancellations snowballed as pilots and flight attendants were unable to reach the right locations for their flights.
American Airlines (AAL) blamed bad weather and the domino effect of flight cancellations because of low staffing levels. And it’s not the only airline struggling…
In August, Spirit Airlines (SAVE) blamed weather and staff shortages for cancelling nearly 3,000 flights in a 10-day period. It cost the airline $50 million and an untold amount in bad publicity.
Last month, Southwest Airlines (LUV) cancelled 2,000 flights in one weekend, for a cost of $75 million and more bad publicity.
Bad weather certainly can cause flight hiccups. But these recent flight disasters are more likely the result of poor management and the “Great Resignation“… Government spending and money printing has made sitting home on the couch a little too attractive for many people.
According to a Bloomberg story from two weeks ago, “Southwest has struggled to hire the 5,000 workers it wants to add this year. It’s facing competition from other industries, particularly for entry-level workers.”
And a FlightGlobal survey from earlier this year highlights the shortage of cockpit professionals, “with only 43% [of pilots] still doing the job for which they trained. Fewer than half of all commercial pilots are still flying for a living, with 30% describing themselves as unemployed and a further 17% furloughed, according to the first worldwide survey of the profession since the COVID-19 crisis.”
In June, 3.9 million Americans voluntarily left their jobs. In July, 4 million workers quit their jobs.
While I’m all for workers having a bigger say in their destiny and pay… and I’m all for a capital-labor equation being better aligned… I’m concerned about the structural shift the economy will suffer in the interim. And the airline industry is just one part of this.
As I wrote last week from Stansberry Alliance conference in Las Vegas — consumerism is alive and well, and it’s never wise to bet against the American economy and U.S. equity markets long term. But even with Vegas showing signs of revival, it is quite clear that establishments simply cannot keep up with the demand because they don’t have the staff.
The airlines are clearly feeling the same bind… And unlike a lot of businesses, America’s carriers face another huge challenge in trying to adjust to our changing economy…
The Customer Should Come First
I fear some of our biggest airlines have lost sight of the importance of their customer and their employees long ago.
They’ve learned to operate on such thin margins, and as a result have become a business of competitive cost-cutting… leading to fewer employees and customers who are treated like cattle.
So in today’s environment, how will they change and shift? Can they? If they don’t, they’ll be left with some angry customers… and fewer of them.
In my case, I had to fight for an American Airlines credit. In the interim, I managed to secure five seats that morning on Jet Blue Airways (JBLU) from Fort Lauderdale to Westchester, NY.
The good news is, I made it home for my father’s birthday party (which I was hosting), but it was no thanks to American — an airline I’ve become quite reluctant to ever fly again.
As our country increasingly emerges from the darkest days of the pandemic, and as people begin to travel again, there will be winners and losers… The airlines that can best serve their customers and keep their employees engaged and happy will be best positioned to reap the benefits.
As a near-term investor, I’m cautious on the airline sector.
While airline stock prices have recovered from March 2020, most are not close to the levels they achieved pre-COVID… So you still have time to get in – provided you’re prepared to wait it out.
A projection by consulting firm McKinsey & Company suggests the industry won’t return to 2019 levels until 2024 or later.
Now, airlines are losing less cash than they did last year… American Airlines (AAL) expects its free cash flow (“FCF”) improve from a loss of $8.5 billion to a loss of $1.13 billion. JetBlue Airways has seen FCF go from negative $1.47 billion to a gain of $297 million. That’s better than pre-pandemic levels. Southwest has seen FCF improve from a loss of $1.64 billion to a gain of $1.06 billion.
Oil prices are continuing higher, which hurts airlines’ profitability. That combined with the much-needed higher salaries for workers will additionally hurt profitability unless the companies are able to pass the increasing costs onto consumers.
They might be able to — consider companies like Coca-Cola, McDonald’s, and Proctor and Gamble, which have been upping prices with no stalls in their businesses. But travelers will only pay more to fly an airline that is dependable and extra nice to its customers…
My best flying experiences have been on Delta (DAL) and Jet Blue, which makes me most optimistic about these companies long term.
Delta is trading near $40 a share, pays a dividend, and is still significantly below where it used to trade. Jet Blue is closer to its pre-pandemic levels at roughly $15 a share, but still has an opportunity to capture more market share. Both companies have management teams that seem to get the importance of the customer in this challenged environment.
We will all start to fly again… It’s part of our American nature to travel. But, just as more folks are working from home and changing their lifestyle all together, I suspect the travel industry might have a real opportunity to meet our ever-increasing customer demands.
Because as the best hoteliers know, the customer is always right.
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Publisher, American Consequences
With Editorial Staff
November 5, 2021