Through The Looking Glass: Airlines That Can Win the Post Pandemic Environment

THE COWEN INSIGHT

Airline shares are not far off pandemic lows, but revenues are above pre-pandemic levels and are keeping pace with costs. We expect higher costs in 2023 driven by labor, fuel, maintenance, and interest expense. Additionally, we also believe revenues will grow driven by ancillaries and a shift in mix to more high-yield traffic.

HIGHER REVENUES AWAIT THE AIRLINE INDUSTRY

Airlines should generate higher revenues in 2023 than in 2022. They are also likely to return to profitability even in the event of a recession. Infrastructure issues, aircraft delivery delays, and labor will continue to constrain how much capacity they can deploy. This should keep a high floor under fares, especially in peak travel periods.

Demand destruction is a risk, but we believe the pandemic solidified the value consumers place on travel. People are taking advantage of the hybrid work environment to travel off-peak and try to secure more competitive fares.

The US economy grew 15% from 2019 to 2022, yet airline capacity is still down by 15%-20%. It is unlikely the industry can add that much capacity for at least the next two to three years, let alone 2023. As discussed in our full report, we believe airlines will return capital to shareholders beginning in 2023.

AIRLINES ARE DOING AS WELL AS POSSIBLE

We provide significant amounts of data to support our view that airlines are doing about as well as possible. Credit card spending by consumers (who hold airline credit cards) is up, and that spend appears sticky. We believe it is important to realize that even with business and international travel still down vs 2019, aggregate airline travel is within 5% of 2019 levels.

SHIFT TO MORE INTERNATIONAL & BUSINESS TRAFFIC

We are seeing a shift in mix to more international and business traffic, as well as increases in ancillary revenue. We estimate there are more than 340K people “missing” from travel. These are the business travelers who are replacing in-person meetings with Zoom or who are taking fewer trips. They are also international travelers who are uncomfortable being on a plane for long periods of time, or who are traveling home to countries where quarantine rules are still in place. In our view, there will be a shift in mix to more of these travelers, especially international travelers in Asia, as those markets open. This will likely start in mid-2023.

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