U.S. Bans Russian Flights to Corner Russia Again Over Ukraine
The war between Russia and Ukraine has shaken the entire world. Sanctions against Russia from various parts of the globe are being imposed following its invasion of its neighboring country Ukraine. Shortly after the U.S.-based major financial service providers restricted transactions in Russia, the U.S. administration came up with the decision to ban Russian flights from the American airspace.
Even before the ban was announced, airline majors like Delta Air Lines DAL and American Airlines AAL had already suspended their partnerships with Russian carriers. United Airlines UAL too followed suite in declaring that it temporarily suspended flying over the Russian airspace.
Coming back to the U.S. decision, per the U.S. department of transportation, the ban covers all passenger and cargo flights, and scheduled as well as charter flights, “effectively closing U.S. air space to all Russian commercial air carriers and other Russian civil aircraft”. The European Union and Canada had already announced decisions to cut off the Russian flights.
To isolate Russia further, following its offensive launched on Ukraine, US President Joe Biden said, "I am announcing that we will join our allies in closing off American airspace to all Russian flights, further isolating Russia and adding an additional squeeze on their economy."
Airfares to Rise?
Delta, currently carrying a Zacks Rank #3 (Hold), suspended its codeshare agreement with the Russian-carrier Aeroflot last week. To severe ties with Russia, American Airlines suspended its agreements with Aeroflot and another Russian carrier S7 Airlines.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
United Airlines, which uses the Russian airspace for flights from Delhi, India, is reportedly evaluating options as to how it can continue operating such flights using different routes. With the above-mentioned flights likely to follow a different route, the possibility of longer flights with more connections will push up the price of the airline tickets. In fact, the United States’ decision to ban Russian carriers from using its airspace, might see Russia slapping a retaliatory ban.
Apart from the possibility of longer routes, the northward movement of oil price is exerting pressure on the ticket rates. Even before the Russia-Ukraine crisis emanated, oil price was witnessing a spike. Russia’s launch of military operations in Ukraine skyrocketed the commodity price further. The upsurge is reflective of the concerns about oil supplies from Russia, which is one of the world's largest producers of the commodity. Small wonder then that the oil price is currently above $100 a barrel, a level last touched in 2014.
Such escalation in oil price does not bode well for airlines’ bottom line as fuel expenses represent one of the largest input costs for these operators. To compensate for the oil price-triggered steep operating expenses, airlines are likely to raise ticket prices.
Pain Ahead for Airlines?
After being ravaged by the coronavirus crisis, U.S. airlines were bouncing back with air-travel demand (mainly for leisure) rebounding nicely. However, they may be in for some turbulence again going forward as we suspect air-travel to be far from pocket-friendly for passengers with oil price shooting up. This might dent air-traffic.
To highlight the improved passenger revenue scenario, which might be under threat again, let’s recap briefly the fourth-quarter 2021 results of Delta, American Airlines and United Airlines.
In the December quarter, Delta’s revenues came in at $9,470 million, which not only beat the Zacks Consensus Estimate of $9,232.1 million but also soared in excess of 100% from the year-ago quarter’s figure as people resorted to air travel during the holidays.
The uptick in air-travel demand in the United States can be gauged from the fact that 82.2% of Delta’s fourth-quarter 2021 passenger revenues came from the domestic markets. However, DAL expects to post a loss for the first quarter of 2022 due to omicron-led headwinds. The current crisis and its associated headwinds might hurt results further.
Owing to improved air-travel demand in the United States, American Airlines witnessed a 5.1% sequential increase in fourth-quarter 2021 passenger revenues. In fact, AAL attracted significant traffic during the Thanksgiving holiday period. This boosted the airline’s passenger revenues (up more than 100% year over year) in the fourth quarter of 2021.
However, due to the omicron-induced labor shortage, American Airlines is reducing capacity. Management expects system capacity for the March quarter of 2022 to decline in the 8-10% range from the figure reported in first-quarter 2019. Total revenues in the first quarter of the ongoing year are anticipated to decline in the 20-22% band from the level recorded in first-quarter 2019. Only time will tell, if the Russia-Ukraine strife further dims the already gloomy first-quarter outlook for AAL.
Like AAL and DAL, fourth-quarter revenues at United Airlines too surged more than 100% year over year, with passenger revenues, accounting for 84% of the top line, soaring 185.4% to $6,878 million.
However, United Airlines also expects first-quarter 2022 capacity to decline from the first-quarter 2019 levels. With the hike in fuel costs likely to hit traffic due to dearer ticket prices, capacity might be trimmed further.
Watch this space for more updates on the Russia-Ukraine conflict and its resultant impact on the airline stocks.
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