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Southwest's ‘staffing issues’ will likely affect holiday travel

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Jonathan Root, Moody's Senior Vice President, joins Yahoo Finance Live to discuss how airlines are faring this earnings season, the outlook for holiday travel and the risk of rising fuel prices.

Video Transcript

KARINA MITCHELL: Welcome back. Well, a slew of airline earnings on deck, American, Southwest, Alaska, United all having reported. And the results are a mixed bag. Here to discuss how airlines weather what's sure to be some turbulence ahead, Jonathan Root, Moody's senior vice president. Thank you so much for being here, sir.

And a mixed bag in the earnings that we've seen. Definitely a lot of turbulence. The airlines have been hit by the pandemic hard. So I'd like your take on the results that we've seen-- good, bad, or ugly. And then also please weigh in of how much earnings were buffeted by federal payroll help.

JONATHAN ROOT: Sure, and thanks for having me. So I think looking at third quarter reporting so far, I think it's a good story for the airline industry. As you say, you know, the pandemic has been so destructive, but I think we're-- can see a light at the end of the tunnel. And things are moving forward. When you look at revenues for the third quarter, they were down, say, 17% to 30% for the big four US airlines. And I think that's a pretty good result relative to what people expected.

The delta variant definitely hampered the third quarter performance, but what's interesting is if you look at the historical seasonality of July to September, September is a trough in that trend. And when you compare 2021 to 2019, the curves are parallel. They're similar. Also, TSA volumes are picking up already in October. And the commentary on the calls, I think, is favorable, where I think we're going to have a very good fourth quarter.

Now, everything's relative to coming out of the pandemic and government action to provide the ability to travel into the US and other countries around the world. I think we're going to see improving demand in the next three to six months.

ALEXIS CHRISTOFOROUS: You know, Jonathan, most of last year, the airline's biggest problem was weak demand. I mean, they were grounded for so long. And fast forward to now, and a lot of the airlines are trying to keep up with that demand. And they're having staffing shortages. And we saw Southwest speak about this on their earnings call. They've actually had a lower capacity for the fourth quarter. Is the staffing issue a Southwest issue? Is it a bigger issue for the airline industry? And how might consumers expect to be impacted?

JONATHAN ROOT: Yeah, I think the issue is broader than Southwest. You know, Southwest took advantage through the pandemic and expanding its network. And with aircraft constraints and then some pilot constraints, it did run into some troubles in the third quarter, more so than other carriers. Other carriers had the problem as well.

Looking ahead, I think it's going to be a challenge for the fourth quarter. And that's because demand is coming in strong. If you talk to the airlines, bookings are strong right now and not just for the holidays. So I think there's going to be a crunch around the holiday, but the companies are going to do their best to move the passengers from origination to destination point. And, you know, we're going to have to take a wait and see.

I think what's important is the utility at the destination far outweighs whatever impediments or hiccups in the journey when you leave your house, get to the airport to your destination. And I think that's going to support demand. There's still tremendous pent-up demand because the inability to travel during the pandemic. And I think that applies. We feel that applies not only domestic, but for international travel. And I think we may see a positive surprise on business travel as we progress into 2022.

KARINA MITCHELL: And Jonathan, so you have a couple of classes. You say demand is up. Also, hopefully, waning COVID cases. But then fuel prices are accelerating as well. How do you square the two? How do airlines remain profitable when we see no end to the spike in energy prices?

JONATHAN ROOT: Right, so a future variant that increases infections and causes people to be a little conservative in their behavior is still a risk. So we are mindful of that. With respect to fuel, if you look going back to 2013, the airlines have remained profitable when Brent oil averaged $100 a barrel. And, you know, that profitability range when Brent was as low as 45-- and that's average for the year-- the US airlines recorded a margin of around, call it 15% or 16%. At 100 a barrel, they were about 8%. So, importantly, they'll remain profitable.

What's interesting or challenging at this stage is because we're coming out of the pandemic, the companies are trying to match capacity to demand, have the resources to serve that level of capacity. We know there's inflation on other cost, other line items.

Now, with respect to oil, they are going to look to recover that through increasing fares. And it's just going to take a little time. Anecdotally, we hear airlines say it takes three to six months to cover the increases in fuel. But we'll see how capacity is managed, balanced with demand, and how much they can drive price. We don't believe the airlines are going to sit there and just take the blow of higher oil price and fuel costs. But they're going to look to take actions to reduce the impact on earnings.

ALEXIS CHRISTOFOROUS: And Jonathan, talk to me about vaccine mandates and the airlines. I know that United Airlines CEO Scott Kirby came out and basically said to customers, beware of who you fly. If they don't have vaccine mandates, you might not want to fly with them. Of course, United has a vaccine mandate. But do you think that those who do have that mandate are stronger positioned in the weeks and months ahead?

JONATHAN ROOT: You know, to that-- I haven't thought about that point. What I would say is, I'm on an indifference curve, truthfully. I think that the companies have their-- make choices about their policies. Individuals make choices. The government does well with respect to vaccination. And I think it's just an individual choice.

As a traveler myself, I'm situated near the hub of a particular carrier, and it's too convenient for me to fly on that carrier. So I'm not going to be looking to go elsewhere. So I'll leave that to individuals to choose, but each company is going to try and position themselves in the best light. And the companies have taken different strategies on this point. But again, it's an individual choice.

KARINA MITCHELL: All right, Jonathan Root, we will have to leave it there. Moody's senior vice president. Thank you so much for your insight.