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Travel: ‘We’re in the best revenue environment in airline history,’ analyst says

Melius Research Director Conor Cunningham joins Yahoo Finance Live to discuss the state of airline travel, airline staffing issues, and the outlook for the industry.

Video Transcript

- All right, let's turn now to a wider look at the airline industry-- air travel hiccups during the Thanksgiving holidays causing more than 4,000 delays according to FlightAware as record travel numbers return. And while some delays were attributed to poor weather, fears remain of whether the industry is staffed and set to handle the crush of travelers set to fly in December. Well, joining us now with a look at the industry is Conor Cunningham, Melius research director. Good to have you on, Conor So, were you surprised that some of these airlines and airports weren't as prepared as expected given that travel demand really hasn't declined anytime soon.

CONOR CUNNINGHAM: So I realize that there was a fair bit of delays yesterday. That was weather-related. Honestly, I honestly thought the operation over Thanksgiving was pretty good, and almost, I would argue exceptional, for what they could control.

The airlines have really pulled back capacity. It allowed the staff properly at the airports and so on. So the operation has actually been pretty good since August, and we've been really encouraged with what we're seeing. Our thing historically about the group is really, like, we're not concerned about the demand picture.

Demand is there, as you were just talking about. We're in a travel renaissance right now. It's really whether or not the airlines could kind of execute during that time frame.

We have a lot of issues over the summer that caught a lot of the airlines by surprise from staffing and so on. But since August, again, I think the stuff has been very good. Again, there were some disruptions for delays but not a lot of cancellations yesterday. So I was pretty encouraged about what we saw there.

- So Conor, what are your expectations, then, as we head into December? Any sort of disruptions that we should be bracing for there?

CONOR CUNNINGHAM: Yeah, I mean, I think that the fourth quarter in general is dictated by peaks. So the airlines need to execute over Thanksgiving over Christmas. And then the off-peak time frames are generally when business travel kind of fills in.

I think that the airlines are hyper-aware that they need to execute over Christmas and will staff properly. So I'm not really concerned about that. Weather can blindside the group at any moment, but from what they can control, things are pretty good.

What we're mostly focused on right now is more on the off-peak. So, corporate travel again is generally when it fills in on these off-peak time frames during the fourth quarter. That's been a little weaker than we would have liked to see.

So there's been several weeks of declines. But the peaks overall, what defines the fourth quarter, are very good. You know, I think Hopper's out there saying that the average ticket fare is going to be $460 give or take over Christmas. So things are pretty good from a demand standpoint. It's really about executing going forward. So that's what we're focused on right now.

- And Conor, as you mentioned business travel, is there an expectation that it will ever return to pre-pandemic levels, and what is it actually going to take to get there now that people have sort of gotten comfortable with this hybrid model?

CONOR CUNNINGHAM: Yeah, not too long ago, people were talking about the demise of business travel, you know, Zoom being the thing that we talk about a lot. And you know, there is a portion of the travel environment on the corporate side that's going to not come back fully as a result of that. The ins-- the going in for a six hour flight to come back for one trip is one meeting is probably done.

But business travel will fully recover. It's just going to look a little bit different. There's been a lot of talk of hybrid itineraries-- so people that go out for corporate travel, but also kind of blend in a leisure trip on top of it.

So it actually creates incremental travel demand overall. So it's just going to look a lot different. The environment is always going to involve travel as it tends to fully recover at some point.

It's just a matter of time. So I do fully expect corporate to come back. It's just going to take a little bit. You know, but again, like, do I expect it to be fully-- or to not recover to 2019 levels?

No, I do think it will. It's just a matter of when. I think next year into January is kind of really when we start to see another uptick in demand from the corporate standpoint, you know, again, assuming that the economy doesn't fall apart and there isn't massive layoffs and so on. Corporate travel should recover into next year, and we'll start to see another step function change into early 2023. So we're looking towards that.

But yeah, from third quarter to fourth quarter, not going to be a huge increase. There's no reason for it. But really, next year is when we're looking for another leg up in the recovery phase.

- And Conor, just quickly, you say that you're increasingly cautious as you look into 2023. What is giving you pause, and how does that differ domestically versus internationally with travel?

CONOR CUNNINGHAM: Yeah, so I think we're in the best revenue environment in airline history. And so it's hard to kind of imagine that kind of continuing into, like, through a recession if we do have one in next year. So we're looking for unemployment figures and whether or not those actually change or not.

That's probably the biggest trigger to slow consumer spending overall. But really, what is making us incrementally more cautious is just labor contracts are open. Pilots are going to get paid a lot more money, and it's getting increasingly more expensive every month that we kind of flag on.

So the upside from the revenue environment could be capped now, and we could see incremental costs headwinds from a non-fuel standpoint. Fuel in general has ticked down. That's been a positive thing overall, and we'll be supportive of margins in the near term.

But I think that the group will generally trade more on the revenue environment and then the actual controllable cost side of the equation from the labor standpoint and so on. So that's really what we're focused on again. So you know, our preference, I think, is really more towards internationally exposed airlines that still have yet to fully recover.

So, Delta, United are our top picks in that environment. And then domestically, I think that you're already seeing full recovery. Leisure really isn't going to get any better. Should be-- as long as it remains solid, it should be good for Southwest and Alaska. But really, the further iterations of the recovery are going to be on corporate and international going forward.

- All right, well, certainly lots of digests there. We do appreciate you joining us. Conor Cunningham, Melius research director, thank you so much.