Monday Insight – September 18, 2023

Fact: Traditional Airline Economics Are Now Hollowed Out
Stand By For Tectonic Changes
In In Air Transportation

Remember the airline business of year 2023? It’s gone.

American. United. Delta. Spirit.

They have all issued new and very downward investor guidance. Suddenly, the glowing implications and forecasts we saw accompanying the 1Q and 2Q airline financial reports are ancient history.

Collapsing; The Traditional Economic Foundations of Air Transportation. This is not just an issue of a couple of passing spikes in cost of jet-A. It is a shift in what drives the cost and the value of moving people and goods using flying machines.

It means that the veracity of air travel and the consumer base that uses it are changing. For airports and suppliers this is a critical factor that requires a complete shift in future planning.

Ignore this at your peril. What is going on today is the start of shifts that have made obsolete much of the thinking in regard to the airline business.

When fuel unexpectedly jumps 20% it’s one thing. But in the last three weeks, other concrete fundamental changes in the operating environment have come to light that represent a nasty economic cocktail that’s fixin’ to hit the airline industry. Airports and communities need to go into full metal jacket mode to envision and plan for these shifts.

The cost of the communication channel called “air transportation” has materially and structurally increased. That means the customer base and the value of air travel have changed as well. This will become obvious over the next six months.

The Nine New Forecast factors for 4Q 2023 & 1Q 2024:

Jet-A costs will not materially decline. Oil has hit $90 a barrel, and there are zero indications of any trends that will knock it down. The policies of the current administration have clearly torpedoed any chance of a return to USA energy independence. That means changes in air transportation economics. That means a lot of sharpened red pencils in the route planning department. Air travel will be viable in fewer market applications.

 Yield softness. Exacerbating this, airlines will have limited fare flexibility. The not-to-worry concept of “fewer passengers at higher yields” we heard earlier this year is out the door.

Labor costs are changing how airlines can fly. New and anticipated airline labor agreements will start to spike operating costs immediately; That will also affect route and market decisions. Big time. And there are more on the way.

The fantasy of re-attracting “air service” at many small communities is all too clear. For small and rural airports, the trends are not encouraging. The new raw economics of aviation point to more rapid reductions in this sector. Another jive consultant “market study” won’t deter a lot of the cuts coming at small airports. Communities need to re-think airport development beyond scheduled airline service.

Fleet shifts will change the players and structure of air transportation. Over two decades ago, the existence of independent regional airlines went into the same historical dustbin as brick-and-mortar travel agents. Gone. That transportation sector evaporated and a lot of the players with it.

For the remainder, which now are not airlines, but lease lift to major carriers, a lot of the economic ground is turning to quicksand. The limited number of 76-seat jets – the new capacity floor for branded airline service – will be under cost pressure as the (misnamed) “regional” lift providers also see the economic effects of higher labor and fuel, hemmed in by existing contracts with major airline customers.

Majors will need much less contract lift. Expanding on the point above, in 2024-2025, the small lift provider sector – which is still mis-labeled as “regional airlines” – will be in an economic vice between lowered need from major airline customers on one hand, and the declining economics of a substantial number of feed markets. In effect, the small lift provider segment of airline leasing will substantially atrophy. Consolidation, chapter 11 filings, complete shutdowns, etc.

 The air traffic control system will continue to flummox air travel. Nothing new, but there is no improvement to a situation that has festered into 40% or higher staffing shortages at ATC centers. It’s likely to get worse. This will again reshape how airlines will be strategizing the future.

 News Flash: Electric aircraft are not the future, at least as things stand today. The Advanced Air Mobility programs will begin to hit a number of brick walls in mid- to late- 2024, as the environmental and social damage of current battery supply chains increasingly become impossible to gloss over. Changes in battery technology and in the access of materials that go into batteries will be critical. Short of this, the AAM sector will be a colossal black hole.

Plan on as much as a 10% decline in ULCC leisure-destination impulse revenue by the start of 2024. Call it a recession, or call it what the wags in Washington care to label it, the economy is not going in the right direction. Consumers are seeing budgets decimated by higher food and living costs. Not conducive to a fun trip to the Florida sun.

Airports: Proactive/Futurist Planning Is Now Critical.

Every airport will be affected by some degree or another. However, it’s important that airports immediately do a forensic analysis of the fundamentals of that traffic.

With that, aggressive and pro-active liaison with the carrier(s) involved is necessary to keep them fully aware that the airport will do all possible to assure their success. And to get clear indications on the future direction of air access.

Call Us for Futurist Air Access Planning. Strategic planning – no scatter-gun studies – will be necessary. In that regard, do consider a Runway To The Future™ program from Boyd Group International.

It’s our tailored approach that takes into account all areas that affect traffic demand – airline strategies, fleet changes, consumer demand factors, shifts in regional air access competition, and more. It delivers a clear view of the future.

More Information – click here. Let’s talk and get ahead of what’s coming down in the next 18 months.

This is no longer business as usual.