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Airlines should be having a 'euphoric moment,' travel analyst says

Melius Research Director Conor Cunningham joins Yahoo Finance Live to discuss the demand for travel, the business travel recovery, and the outlook for airlines amid ongoing operational struggles.

Video Transcript


JULIE HYMAN: Welcome back. If you were out traveling, flying around this weekend, you may have experienced some serious delays at the airport as demand for travel is growing. Airlines continue to deal with pilot shortages.

Our next guest says, the demand might not actually last. So what effect is that gonna have on the industry? Melius Research Director Conor Cunningham is joining us now. So Conor, obviously, we're heading now past summer, past the big increase, the big surge in travel that we had seen. What is happening? What are you already seeing in terms of demand as we head into the fall and winter?

CONOR CUNNINGHAM: Thanks for having me. Yeah, this weekend was OK. We saw-- you know, we saw numbers above 2019 levels for the first time in some time. Those-- that's encouraging. Leisure, you know, as you mentioned, is gonna start to trend off just seasonally.

You know, I dropped my kids off to school today. You know, people-- this is really gonna be the business travel season. So that's the big question mark for a lot of investors, just how strong is it gonna be.

You know, one thing that we've been looking at a fair bit is airlines with international exposure, should be OK. We've seen international demand remain pretty robust for quite some time. You mentioned earlier on your program the dollar index is at all-time highs. So you know, you're getting more for what you're doing internationally. So you know, that's an encouraging sign. But yeah, the real question mark is really around business travel.

I know we struggle with the idea just around capacity right now. As you mentioned, there were a lot of delays over the weekend. Delays are better than cancellations, though, obviously, not great. But you know, we're get-- we're moving in the right direction, I guess.

And so, you know, there still is a lot of uncertainty about 2023 and what that's gonna look like. Our preference right now is airlines that are willing to be smaller for longer are the ones that are gonna perform the best. That's the Deltas of the world, Southwest to some extent, and Alaska Air Group is our other topic.

BRIAN SOZZI: Conor, we've been talking all morning long about rising energy prices in Europe because of what's going on there with Russia and as it battles the Eurozone. You don't think that's going to have an impact on those international-focused airlines?

CONOR CUNNINGHAM: I mean, it's not-- well, US point of sale. So you know, people flying from the United States to Europe are not gonna be as impacted as much. I mean, it's-- you know when we think about point of sale from international to the US, that's where things are a little bit more dicey. I'm less concerned about that. You know, the airlines do a pretty good job of changing where they're going to sell their tickets and really driving demand there.

So that's not too big of a concern for us. Again, like the ones that I think-- if you can be smaller for longer, you maintain some sort of pricing power. And as long as the demand is still there and we don't head into some massive recession, things will be OK, I think.

JULIE HYMAN: Conor, I think I asked you this the last time we talked to you and I keep hoping for a different answer. Are prices gonna start to come down?

CONOR CUNNINGHAM: [CHUCKLES] I mean, my hope is that they don't. You know, so again, like I think that airlines they need to be really disciplined with their capacity at the end of the day. That's the only way that you maintain pricing power. There will be some airlines that will want to grow a fair bit. You know, the ultra low cost carriers talk about 30% growth in 2023. We'll see if that actually materializes, again, like they're banking on, you know, Airbus and Boeing kind of getting their act together and delivering the aircraft on time.

You know, they've got to get back to growing for prices to kind of come down. And again, my preference is that they remain smaller for longer so they maintain some sort of pricing power. This should be a euphoric moment for the airlines. I mean, again, there's never been an environment where capacity has been constrained as much as it has. You know, they got to get out of their own way and kind of fix operations like we mentioned earlier.

So we'll see. I'm hopeful that pricing power will be maintained on some level. But there will be the, you know, opportunities for cheaper fares, if you're willing to look offpeak, fly on Tuesdays, come back on Saturdays, that type of thing. So you know, you will have your opportunity to take your cheaper vacation from time to time.

BRIAN SOZZI: Conor, you've mentioned business travel several times. Is there one airline poised to really crush it for business travel for this holiday season? And why might they?

CONOR CUNNINGHAM: Yeah, so Delta is our top pick when we think about international and business-related demand. You know, they're traditionally the largest business-oriented airline out there. There is some hopeful signs of people returning to the office a lot more in droves. I know New York is kind of up and about right now so we'll see.

You know, my-- again, like given where the stock is, you know, right around $30, people aren't banking on a huge surge in demand for corporate. We are hopeful that it will show some modest improvements over the next couple of months. You know, it's-- you know, corporate travel can be fickle at times so we will see, but there is some encouraging steps being made from there just from a return-to-office standpoint.

JULIE HYMAN: Conor, the flip side. What airline stock would you not touch with a 10 foot pole?

CONOR CUNNINGHAM: [LAUGHS] You know, I-- the stocks are all down a lot over the last couple of months. You know, JetBlue, we've always struggled with. They're going through a major merger. That's one that we-- you know, we aren't all that comfortable with in the near term. The stock is getting cheaper and cheaper so we will see.

But overall, we're relatively neutral in the space. We really struggle with just, again, the outlook for stabilized capacity and whatnot. So if you can-- if your expectation is that you're gonna grow a lot, you know, into 2023, you know, that is up for serious debate, I believe.

And so again, you've got to have the coming to Jesus moment where you-- work capacity just isn't gonna be what it is in '23, and you're gonna have to really work on your cost structure and develop a plan that will overcome a lot of inflationary pressures. So you know, JetBlue in the near term is one that we struggle with a fair bit.

JULIE HYMAN: All right, Conor, thanks so much for your perspective. Really appreciate it. Conor Cunningham, Melius Research Director, appreciate that.