Monday Update – November 4, 2019

The Emerging Landscape for 2020

With just two months to go to the New Year, we thought it might be an idea to look into a couple of emerging key issues facing air transportation in 2020…

Enplanement Growth: Look For @ 2.5% to 3.0%

It’s not that the economy isn’t strong. The facts are clear in that this is one of the most robust situations in half a century.

But air travel growth will moderate to under 3.0% in 2020 – maybe even to under 2.5%

The reason… capacity. Contrary to the antediluvian assumptions in traditional traffic forecasting, airlines are no longer the caboose on the economic choo-choo, to badly mix metaphors.

An analysis of the fleet plans at US carriers shows that in 2020, it’s airline capacity that will be the major factor in airport traffic growth. Load factors will continue to average in the 80%+ range, and, as will be noted below, it’s dollars on board, not necessarily passengers, that will be the driving factor.

This doesn’t mean that seat pitch is going to increase, but the trends over the horizon are indicating that airlines will be looking at service-related initiatives as the future.

And, as noted next, that doesn’t necessarily mean more fees and charges – the goal will be to entice the consumer with more perceived value for a higher spend.

Trend: Revenue Factor v Load Factor

Following from the above, United’s plan to take what are basically 70-seat CRJs, and configure them for 50 seats, including a reportedly “self-serve” first class section, may be the harbinger of a wider trend in the airline industry.

The accepted wisdom is more seats, not fewer. United may be in the process of setting up some new “wisdom.”

The success of premium economy – which, admittedly is mostly in the international sector of the airline product mix – does point to the potential discovery of a wider pool of consumers willing to pay a slight bit more for what is perceptually a higher product.

The United CRJ-550 concept may be the start of a wider trend toward pursuit of revenue share, instead of just more passengers.

Indications will be clear by 4Q 2020.

Prediction: Clearer Market Differentiation – ULCC v Mainline Airlines

Heresy: An airline seat is not a consistent commodity – at least not anymore. It depends on the category of tushy sitting in it.

The Allegiant seat out of Concord, NC is not the same product as the AA seat out of Charlotte.

The first is a vacation/leisure product aimed at discretionary spending. The second can also be aimed at capturing discretionary dollars, but that is mostly secondary to flying planes that meet demonstrated consumer needs.

That brings us to the cloudy examination in regard to where the two models will eventual overlap. Increasingly, it’s becoming apparent that there’s a lot less competition between these models than some veneer analysts may suggest.

Raw example: Allegiant’s service to Florida from Hagerstown represents very little suction of revenues or passengers from carriers at Baltimore. Not only that, but a lot of this traffic segment isn’t of interest or of value to Southwest, American, United, et al., when their load factors are well into the 80% range.

This can get some in the analyst Peanut Gallery a bit confused.

Not too long ago, a profound “competitive review” was issued from some august research firm, proclaiming the deep yogurt Southwest was in at Denver.

Yessir, according to their divination of the numbers, Southwest was just getting competitively hammered.

See, the fact was discovered that Southwest’s average yield at DEN was XXX% (whatever, it was a lot) higher than that of Frontier. Danger! Danger!

This meant, the report concluded, that Southwest was losing out on capturing low-fare travelers, and as a result it was a lead-pipe cinch that WN would soon find it imperative to lower fares, and, yes, “revert back” to charging for baggage and change fees. (“Reverting” to doing something they hadn’t done in the past? Let it go, the analyst was on a roll.)

Now, Southwest at the time was experiencing an 88%+ load factor at Denver. So, according to this guru, they should chop fares to get people into those same seats who want to pay less.

Knowledge of the subject matter, apparently, was not a job requirement.

All this report needed was an organ grinder and a small monkey to complete the visual of where it came from.

The issue, in any case, is to what extent will ULCCs actually competitively affect the traditional air service model. They are adding lots of planes and capacity. Boyd Group International projects that by the end of 2021, ULCCs will exceed 12% of total seat capacity.

But the question is how much of that is essentially in a different business, aimed at different consumer stratas.

We’ll see this get more clear in the next 12 months.

Issue: Boeing 737 MAX

The indications are that the airplane will be approved for service by January or February.

But that doesn’t necessarily mean “in service.”

Remember, even subsequent to the grounding, the factory has been building an average of 42 737s a month – that means somewhere around 400 new MAX airliners are now sitting somewhere, and will need to get un-pickled and be modified. Some will require final completion and installation of customer-specific equipment.

That could take time.

And while the four US airlines affected – AS, AA, UA and WN – want these machines in the sky tout suite, there are issues regarding pilot and maintenance training, plus the raw ability to absorb new airplanes into the fleets.

One thing that has not taken place is the “summer of chaos” at airports, as some predicted. The fact is that the fleet plans at United and American have included addition of other aircraft types, including A-319s coming off lease from other carriers. Southwest, however, has not had that option.

But the Fall of Saigon reenactment – intimated in some sources as a near certainty for large airports due to the MAX situation – didn’t materialize.

Hint, it may be a surprise to a few folks in the media, but when an airline decides not to add flights into its schedule, that is not the same to the consumer as a “cancellation” – which has been the din from some corners of the Fourth Estate.

Prognostication: a smooth recovery in regard to new capacity, mostly at AA, UA and WN.