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Grey Skies Ahead

Updated: Oct 3, 2022

Hey Traderade Family, with all the news of flight cancellations over the past few weeks, I thought it might be a good time to re-examine what’s going on with the aviation industry.


The flight cancellations are not consumers cancelling flights but rather the airlines cancelling flights. At a time when there's so much pent-up demand, it doesn't bode well that airlines can't keep up with demand.


Returning Demand

According to IATA, in early May, the gap between 2022 bookings and 2021 bookings (as a proportion of 2019 levels) was 66 and 70 percentage points for the EU and Canada respectively, whereas in the US this gap was only 26 percentage points. China however, continues to face headwinds.


The chart below clearly demonstrates that the bookings are back to almost an average of 80% of 2019 levels. Consumers are done with staying home and want to travel.



Global and domestic air travel continues to recover


Consumers have been booking both international and domestic flights. The last few weeks on the chart below is the effect of seasonality as most consumers would have already booked their flights in advance, so ticket sales have dropped off now.


But, what’s going on with the airlines?

The airlines unfortunately are plagued by rising costs and labor shortages.


Jet Fuel

Not surprisingly, Jet Fuel costs have been soaring with the global rise of energy costs. Some of that has “normalized” but still much above the 2021 average level of $2/gallon.

As a result of which, fuel costs for airline have obviously increased and for airlines like American Airlines, this has soared to 30% of their revenue.

Labor Shortages


Labor Shortages are primarily due to longer lead times for onboarding and background checks. In the US, there is a chronic shortages of pilots.


In May 2022, Alaska Airlines canceled 50 flights per day due to the lack of pilots. British Airways slashed 10,000 workers at the height of the pandemic and they are set to cancel more than 10,200 flights throughout the summer season.

Outlook


Global Outlook for GDP has now been lowered and there’s a very real possibility of the world going into a recession.


For the airline industry this simply means that the operating environment will continue to remain challenging. While supply-side issues continue to plague the airlines, we believe that demand will also start to temper after the summer season and the industry will start to struggle yet again post the summer peak.


We remain vigilant on the airlines and the ETF “Jets” and continue to monitor it as a potential short.



1 Comment


My largest client has a corporate aviation team with about 20 pilots. They have an age based mandatory retirement that tracks FAA guidance, but they are looking to adjust that age upwards because they can't find pilots. Pretty hard to believe.

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