Monday Insight – November 21, 2022

Three Preliminary Observations – Aviation 2023 

One: The Main Attraction – ULCCs Move Out of The Model. For Network Carriers, It’s DEFCON 1.

For the first time in 20 years, major airline fortress hubsites are vulnerable. Load factors are at or above 85%. Plus, material percentages of network carrier departures are operated with airliners between 50 and 76 seats.

That opens opportunities for ULCCs, which are facing near-certain declines in impulse/leisure demand due to the recession and inflation. They are looking for new sources of revenue, and the current state of at least five major airline connecting hubsites are vulnerable.

Mark it down. The industry is in for a major competitive restructuring in 2023. The current parallel universes between network and ULCC carriers are about to collide.

Not to put too fine a point on it, but we’re possibly looking at a major competitive Armageddon in 2023, with ULCCs going from impulse-driven traffic to poaching revenue from core network carrier routes. In short, the ULCCs are jumping the fence and going after traffic now carried by American, United, Delta and Southwest.

They have no choice. On the air side, Frontier and Spirit are aggressively shifting strategies, reducing Florida and implementing head-on competition right in the middle of network carrier hubsites. 

Message: the underpinning of ULCC traffic – leisure discretionary travel – is shrinking. Message: this is not a drill for major carriers and their hubsite dominance in 2023. ULCCs have airplanes that need to go somewhere 

Two: New Fleets – Raising The Bar For Air Service Retention, Let Alone Recruitment. On the route and market side, major airlines are shifting fleets. As 50-seaters are pulled down, the only new replacement (under current scope clauses) is the Embraer E175. The reality is that these require a lot more revenue, and also, they are not replacing ERJ and CRJ airliners one by one.

The fallout is not hard to predict. Rural and small community hub feed faces a much higher economic bar. And it’s not primarily due to lack of pilots. It’s lack of acceptable ROI.

Three: International Access – The EU, Yes. Asia No. Trans-Atlantic revival has a pulse, although the leisure sector – which is a lot less vulnerable than impulse trips to ‘Vegas – still has some questions.

Asia? Not happening. China – which in 2017 was about 8 million US O&D – is a trickle. Consumers in the Middle Kingdom are now restricted from leaving, and due to CCP policies, inbound tourism is dead. Business? Not happening, either, with Covid shutdowns and major focus now on human rights abuses.

With a very unstable government running China, including threats of military action aimed at Taiwan and the South China Sea, other points in Asia aren’t going to be at the top of the leisure or business travel bucket lists. Australia, New Zealand and the South Pacific may be a bright spot, but not to the extent of making up for the rest of the trans-Pacific shortfall.

Four: Small Community Air Service Economic Realities Finally Hit Home. Let’s put it this way. The fact is that air transportation has evolving economics. These are driving changes in airline strategies and fleets. These in turn are literally causing regionalization of air access in regions.

In 2023, reality will emerge from the smoke and mirrors of scattershot ASD programs that assume an airline industry no longer in existence. With the economic evolution, the need for small communities to rethink their communication channels and start to re-plan the future impact potential of the local airport will move front and center.

Prediction: The study-it-for-months ASD approach, when the bottom line is obvious, will die out as more and more communities learn independently about the structure and strategies in the airline industry.

The new trend will be industrial development opportunities for rural airports. This will dovetail well with dynamics in places such as Illinois and California, which appear intent on driving businesses and investment away.