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Infrastructure issues are ‘plaguing’ the airline industry: Analyst

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Helane Becker, Cowen Senior Research Analyst, sits down with Yahoo Finance Live to examine United and American Airlines' earning reports and what factors are impacting the airline industry the most.

Video Transcript

DAVID BRIGGS: American Airlines also the latest to report earnings, posting their first quarterly profit without government assistance since the pandemic began-- we talked about that a little bit with Seana-- though they did cut growth plans on continued disruptions, and that appears to be what is hammering that stock, as you can see, down more than 8%.

Let's discuss with Helane Becker, Cowen Senior Research Analyst. Nice to see you. Is this as good as it gets on the heels of what we saw with United, both warning of a profit cut down the road?

HELANE BECKER: Yeah, I think the way to think about it is we're probably somewhere in the middle of what's likely to happen over the next six or nine months. I think plaguing the industry, in general, are infrastructure issues. It's not just the airlines. Obviously, all their support people, the airport's air traffic control and its baggage handler strikes in Europe [INAUDIBLE], it's just everything is kind of weighing on the industry.

People want to travel. I heard you and Seana talking about revenge travel. It's been a great summer. I asked all the airlines when we would expect to see-- or when they expect to see any decline because airline travel is generally good until it's bad, and you don't really see those bookings slow.

But that said, we did see a downturn in June. We saw a slowing of the recovery, not so much in leisure because, to your earlier point, leisure traveler's going to be good through at least August. And then in September, as people return to office and kids go back to school, we're likely to see business travel come back. And the question really is, and I think this is what's weighing on those two stocks in particular, is will companies put the brakes on business travel if we're in an economic slowdown and they're-- the airline customer. So think the big corporate, small and--

DAVID BRIGGS: Helane.

HELANE BECKER: --medium-sized businesses, will they see a downturn? Yes, David?

DAVID BRIGGS: Sorry to cut you off. Just to follow up on that point, American said this morning that business travel is back 75% to pre-pandemic levels. I think the question also is, is that 100% of the new norm? Is that maxed out?

HELANE BECKER: Yes. I don't know the answer to that question, but I think the answer is yes. I think it's going to be really hard to get back to 2019 levels for business travel, given the high cost and the disruptions. People want to go-- if you're going to take a day trip, you want to know that you're coming back today. If you're taking an overnight trip, you don't want it to last for several days. So I think you're seeing that companies are putting the brakes on travel as well. So yeah, 75%, 80% of 2018 levels may well be as good as it gets.

RACHELLE AKUFFO: So Helane, in terms of the biggest expenses for airlines, obviously you have jet fuel, but then we continue to see some of these staffing shortages also plaguing the industry. What do you think is going to weigh heaviest when it comes to the input cost for some of these airlines?

HELANE BECKER: Yeah, Rachelle, that's a great question. I think, first of all, CapEx. CapEx is pretty high as the airlines struggle to meet 2050 goals. I know it sounds like that's a really long time away, but airlines that are ordering aircraft now and taking delivery of them between '22 and '27 are going to be operating these planes then. So you've got big CapEx numbers, not so much for American, but for sure for United. I think it's something like $20 billion over the next four years. So that's number one.

Number two, you pointed out fuel cost. Fuel cost-- and it's not even fuel cost alone. It's the refining margins that are as high as we've ever seen it. So that's the second input cost that's concerning. We talked a little bit with David and Seana about the infrastructure costs, so that's high. Maintenance costs are a lament.

And then airport costs are high, as well, because airports have to attract people. The contractors who handle some of the third-party-- third-party contractors who handle some of the work for the airlines, they are raising salaries to attract and retain personnel. So yeah, across the board, it's putting pressure on costs, which puts pressure on margins if you can't recover that in revenue. And to David's question about demand, as demand-- if demand doesn't remain robust into the fourth quarter, then you're going to have margin compression, and that's really what the market is concerned about.

SEANA SMITH: Yeah, Helane, you mentioned the fact that we are seeing added costs, particularly when we look at what they're doing to lure some of those pilots. American coming out saying that they're going to boost pay. They're going to add bonuses to try and help alleviate the pilot shortage that they are seeing.

How long until you think they have the number of pilots that they need in order to meet this demand? I know you were saying it could be a rocky six to nine months. Are we looking at nine months from now we could be back to those, quote unquote, "normal times?"

HELANE BECKER: No. No. No, I was just thinking six to nine months in terms of maybe everybody but pilots. I think it's going to take a few years to get back to that level. And the reason is it takes two to three years just to train a pilot. And then to get those hours, the 1,500 hours that they need to be able to fly commercial passengers, takes four to five years.

And what American also said this morning that you probably heard was that their regional operation is smaller, and going forward, a lot of aircraft-- a lot of routes are going to be flown by mainline aircraft. Well, that's because they don't have enough pilots in the regional network. Think about those little planes, the 50 to 70 seaters. They require 10 pilots per plane. So it's two crews, and every aircraft needs five crews. So they've got 150 parked. That means they're short 1,500 pilots.

United has 100 aircraft parked. They're short 1,000 pilots in that regional category. So it's going to take years before that recovers. And the corollary is that small and medium-sized cities that are within, say, a two-hour drive of a hub are going to lose service. And for those cities that do maintain service, fares are going to go up to recover the cost.

DAVID BRIGGS: And other than the pilot shortage, perhaps the biggest question looming over the industry is the Big Ben parliament, as I call it, of the airline sector, which is the Spirit merger. Put this off, the vote, I think four times now, I'm losing count, with JetBlue or Frontier. How and when does this end, if you can in 20 seconds or so?

HELANE BECKER: Yes. I think it ends with, most likely, Frontier walking away and JetBlue winning, if you can call it that, the bid for Spirit. It's clear they don't have the votes. So they've had to postpone the vote, and I don't think it's going to go anywhere, frankly.

SEANA SMITH: All right. Helane, we'd love to have you back to talk a little bit more about that merger and what that means--

HELANE BECKER: Sure.

SEANA SMITH: --more broadly speaking, for the industry, but we've got to leave it there. Helene Becker, thanks so much for joining us.