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As Delta variant weighs on travel, expect every airline to update guidance: analyst

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Southwest Airlines is warning that it may not be profitable in Q3 as the Delta variant continues to spread. Yahoo Finance’s Julie Hyman, and Myles Udland discuss outlook for the airline industry with Helane Becker, Cowen Senior Analyst.

Video Transcript

[MUSIC PLAYING]

JULIE HYMAN: Well, all markets have largely shrugged off the impact of the Delta variant as it spreads, but we are potentially seeing some pockets of exposure in parts of the economy. Southwest Airlines, for example, said that the surge that we have seen in cases tied to Delta is hurting its bookings, and it's going to make it harder for the airline to make a profit in this current quarter. Helane Becker is with us now, Cowen Senior Analyst, who covers the airlines.

Helane, it's good to see you. And it has been interesting how, by and large, we haven't seen market participants too concerned about this. But this really brings home that there are some risks for this. We haven't seen the other airlines make these comments, but how widespread do you think these issues could be?

HELANE BECKER: Thanks for having me on. I appreciate the time. I think that everybody's going to update guidance at some point. I think the question is, how much is related to the Delta variant causing a decline in listing and bookings, and how much of the deceleration in forward bookings is caused by normal seasonal weakness? So, you have two things at play here.

Normally in August, especially mid to late August, you would see a decline in forward bookings as people start to return from vacations, go back to school. Here you have the added pressure, I guess, of returning to office. So, you have all of that combined at a time when the Delta variant obviously seems to be running rampant in locations where you don't have a lot of people who are vaccinated, and that's causing people to rethink their close in plans. And I think that's what Southwest was saying this morning.

The other thing too. They didn't say this specifically, but I've talked to all the airlines this week, and I am hearing last week, there was a lot of bad weather in the US. I wasn't in the US last week, but there's a lot of bad weather from what I could tell. And that caused a lot of flight cancellations.

And so, you have some decline in August related to the fact that airlines had to either do refunds or move crew members around who got caught out, because of thunderstorms and they were in the wrong spot. And then you had, for a consumer perspective, giving people refunds, which I mentioned. And then you had to give them hotel vouchers, or meal vouchers, or rebooking, and so on. So, I think there's, like, three things going on here, and that's what you're saying.

MYLES UDLAND: Yeah, and Helane, we're kind of going around the short term potential, you know, quarter on quarter margin impacts. All of that stuff that, you know, you analysts spend a lot of time thinking about. But ultimately, I look at the market today, right, and Southwest shares are off 1/10. American shares are actually up about 1%.

And it seems like investors have decided that the story for the airlines is they're going to make it through and will figure out what the new normal is in a year or two. Is that kind of the sense you get from talking to both the airlines and also to your clients?

HELANE BECKER: Yeah, to the investors, I think everybody's decided to try to power through this, right? We've heard from various people who are smarter than me with the health care issues that are basically saying, this may be a short lived variant, and then we're through it, and maybe we go into the fall, and we're done. I don't know. I'm not smart enough to figure that part of it out.

But yeah, Myles, I think that one of the things we're definitely seeing is people are tired of hearing about it. They don't want to-- they want to get out and about. You see that with the strength of bookings and travel this summer. And I think people are, and I think the airline industry in general also, is just ready to get on with whatever our next normal is.

The industry has plenty of liquidity. The government made sure of that. The airlines have pretty good-- I mean, the balance sheets have deteriorated a lot.

You and I have talked about that, but that said, the airlines have done a really good job of trying to raise fares, and trying to just pay down debt, and get back to a position. And it will take a couple of years, to your point, before we get there. But I think that the demand will remain robust.

People want to go. And you're seeing it in full load factors. I think Southwest said this morning that load factor was, what? Mid-80, it's like 85%, 87%. I mean, those are not insignificant numbers, right? And if you've flown at all, or any of your viewers have flown at all, they've seen full planes and long lines at airports. So, yeah, I think we're just going to power through and just hope for the best on the other side of this.

JULIE HYMAN: Helane, do you think the fact that United is now going to be mandating vaccinations for its staff, is that going to give it a competitive advantage?

HELANE BECKER: I think so. I think, yes. Yeah, I was really impressed with that decision. And then Hawaiian Airlines and Frontier Airlines both said that they would mandate vaccines for staff as well. I know Delta said that they would not mandate vaccines for staff, but all new hires had to be vaccinated.

I think you'll-- others will probably follow, if this is going to be an industry standard. But I mean, not to get political. I think having people vaccinated is an advantage.

MYLES UDLAND: And then--

JULIE HYMAN: Yeah, it would seem to be. Sorry, go ahead.

MYLES UDLAND: Yeah, sorry Julie. Helane, and just finally, you know, we're getting through the summer season here, and Southwest flagging that Labor Day still looks strong. When is it time for you guys to start thinking about what the holiday season might look like for some of these airlines, and how that might shake out? And you know, if that's the time to bring more crews and more planes back online, or if people like this? And 87% indeed was the load factor for Southwest in July. Or if the airlines are happy keeping that number high and maybe thinking about turning a couple of gears on fares?

HELANE BECKER: Yeah, I'd love to see them turn gears on fares already. I'd like to see them keep capacity where it is and raise fares. That would be a good thing from the analysts' perspective, maybe not for my personal pocketbook perspective. But I think that, for the holidays, especially if the Delta variant kind of burns itself out, you're going to see huge demand.

And people who may not have had the opportunity to travel this summer will want to travel over the holidays. You always see-- not everybody goes home for Thanksgiving, but they always go home for Christmas and New Year's. And I think that what you're going to see, it's too early, right? August is just too early, but that said, the airlines are definitely in hiring mode.

Everybody has said in the last four or five weeks that they're hiring more pilots, or hiring flight attendants, or looking for ground staff. So, that's going to continue right through the holidays and into 2022, because this is not going to be with us forever. I mean, we're at a year and a 1/2. How can this possibly stay forever? And that although, I've been wrong before.

Then when you go into the holiday season, they will bring back additional aircraft. They're doing that. You see the Max being delivered to United and American. Delta announced an aircraft order two weeks ago.

So, the capacity is coming back on stream. They're going to have to hire to fill those positions. And then they're going to have to offer fares that are competitive with others out there, that attract passengers to the products.

So, yeah, all around, I think-- I guess what I'm saying really badly is that I never expected the recovery to be linear. We always expected it to be choppy. But I don't think I expected, like, I don't know. What wave are we in, like, fourth, fifth, sixth?

I never expected all these different waves of COVID. I kind of expected it for us to flatten the curve and move on with our lives. And that's certainly not what's occurred.

JULIE HYMAN: Yeah, definitely. I think, you know, we're all trying to figure this out.

[LAUGHTER]

And our predictive ability is, not that it was ever great as human beings, but it's certainly not been helpful. Helane Becker, it's always a pleasure to catch up with you. Thanks for your perspective on this. Helane Becker of Cowen. Have a great day, Helane. We'll talk to you soon.