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July 18, 2022

 

Travel is taking off once again post-pandemic. The International Air Travel Association (IATA) recently boosted its 2022 forecasts, projecting that global air traffic will grow 98% this year compared to last year — reaching 82% of 2019 levels (versus its earlier, more conservative estimate of 59%). However, the road has been anything but smooth in recent months, with mass flight cancellations causing widespread travel disruption and chaos across the U.S. and Europe.

In this report, J.P. Morgan Research examines the factors contributing to these flight cancellations and what they mean for both consumers and investors.

 

In our view, staff shortages will continue to impact airport operations as we move further into summer and won’t be completely fixed overnight, especially as demand surges once again during the school holiday period.

Harry Gowers, European Transport & Logistics Analyst, J.P. Morgan

Why Are Flights Being Canceled?

Flights are mainly being canceled due to labor shortages — both in the air and on the ground. According to figures from the Air Transport Action Group, the aviation industry lost 2.3 million jobs globally during the pandemic, and workers have been slow to return.

“It’s been tough for businesses to recruit people, especially as the onboarding process for airline and airport staff is a lot longer due to the background checks involved,” said Harry Gowers, European Transport & Logistics Analyst.

In the U.S., a chronic shortage of pilots is contributing to flight cancellations — in part due to the high cost of training, which can amount to more than $150,000 per pilot and is not typically covered by federal student loans. In May 2022, Alaska Airlines canceled around 50 flights per day, citing a lack of available pilots. And in September 2022, American Airlines will cancel services to Toledo, Ohio; Ithaca, New York; and Islip, New York following the Labor Day holiday weekend, due to what it describes as a “regional pilot shortage.”

In the U.K., British Airways is also grappling with a labor crunch after shedding 10,000 workers during the height of the pandemic. The airline is set to cancel more than 10,300 flights — entirely on short-haul routes — throughout the summer season, all the way to October. This has been fueled by the U.K. government’s recent one-off amnesty on takeoff and landing slot regulations (ended July 8, 2022), which offers airlines the chance to cancel flights without fear of financial penalty. “We expect the new cutbacks to amount to an additional 3% of BA capacity (in Available Seat Kilometers), taking the total to around 13% of the original schedule canceled since May,” said Gowers. In addition, London Heathrow Airport is imposing a cap of 100,000 daily passengers through September 11, 2022 due to staffing issues.

These labor shortages are further compounded by the threat of industrial action, which is particularly rife in Europe. Spain-based easyJet staff are planning three 72-hour strikes in July 2022 over a pay dispute, while refueling workers at Heathrow are planning to stage a three-day walkout the same month — again, over wages.

What Do Flight Cancellations Mean for Consumers?

Unfortunately, these staff shortages could spell a summer of discontent for travelers, who face the prospect of further flight cancellations over the next few months. “In our view, staff shortages will continue to impact airport operations as we move further into summer and won’t be completely fixed overnight, especially as demand surges once again during the school holiday period,” said Gowers. “However, the situation should get incrementally better post-summer, especially as more staff come online and as we experience a potential tapering of demand heading into winter.”

That said, consumer demand this summer remains strong across major markets. Recent flight cancellations and disruptions across Europe have led to questions around whether summer could disappoint if customers fear supply-side stress within the aviation system. But so far, that does not appear to be the case and strength in bookings for summer currently remains unchanged. Ryanair and Wizz Air have both reported strong load factors for June 2022, at 95% and 86% respectively.

In the same vein, demand remains elevated in the U.S., where flight disruptions have not deterred consumers from traveling. “Following a soft patch attributed to Memorial Day timing, daily indexed Chase credit card spend [on air travel] remains comfortably above 2019 levels,” said Jamie Baker, U.S. Airlines and Aircraft Leasing Analyst. “In fact, the summer travel season appears to be one of the strongest on record.”

 

Business and international travel continue a strong recovery, leisure travel remains well above 2019 levels, and our Chase card spend data hasn’t rung any alarms.

Jamie Baker, U.S. Airlines and Aircraft Leasing Analyst, J.P. Morgan

And What Does Airline Industry Disruption Mean for Investors?

Increasing industrial action and supply-side issues around staffing shortages are adding more noise to a sector that is already being impacted by the Russia-Ukraine conflict, higher oil prices and inflationary pressures.

Cutting through the noise however, opportunities for investors remain. “The worry for investors is that consumers concerned about travel disruptions avoid buying last-minute tickets, which are typically the highest-yielding bookings and are key for profitability. However, the evidence shows that there has not been a drop-off in demand,” said Gowers. “Generally, we think the capacity cutbacks we are currently seeing from carriers intra-Europe could further lend themselves positively to industry pricing this summer.” Indeed, with demand outstripping supply, airfares across the board have increased significantly — jumping 12.6% in the U.S. and 26.5% in the euro area in May 2022 — resulting in higher yields.

Besides flight cancellations, investors have to consider the increasingly likely prospect of a recession as well. In June 2022, U.S. airline stocks tumbled 37% from their six-month highs, closing in on the typical 40% correction that has preceded most U.S. recessions. “North American airlines continue to shed market value behind a tumultuous macro backdrop renewing recession fears. Importantly though, the equity sell-off has not resulted from weakening fundamentals, in our view,” said Baker. “In fact, business and international travel continue a strong recovery, leisure travel remains well above 2019 levels, and our Chase card spend data hasn’t rung any alarms despite dipping in line with the usual post-Memorial Day travel lull.”

In addition, the industry is still under-generating revenue, and J.P. Morgan Research expects continued air travel recovery to offset some of the natural tendency for recessions to diminish momentum. “In short, we remain bullish on the space but acknowledge that recession indicators have dampened the outlook,” said Baker.

Against this backdrop of recessionary fears, discounters are expected to seize greater market share and emerge as structural winners overall. “If previous recessions are anything to go by, consumers will typically trade down from higher-fare carriers to lower-fare carriers,” said Gowers. “As such, we prefer low-cost, lower-fare operators as we head into a more uncertain consumer environment.”

 

Low-cost carriers tend to do better during a recession

Line chart showing that the revenue of Big 3 airlines in the US was lower than that of the Discounters during the global financial crisis

During the global financial crisis, the revenue of the U.S.’s three biggest airlines (American, Delta and United) was hurt more than that of the discounters (including JetBlue, Southwest and AirTran)


 

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