Airlines’ challenge is cutting costs, not filling seats
By Niraj Chokshi
There is little sign that higher fares or recession worries are curbing the pent-up demand for air travel. But higher expenses and staffing shortages are hampering the nation’s airlines as they seek to take full advantage of the rebound.
Delta Air Lines is the latest to rein in its plans. Last Wednesday, Ed Bastian, Delta’s CEO, said that although demand was strong, the airline would fly the rest of the year at the levels it operated in June. The aim is to limit delays and cancellations, which have been problematic in recent weeks.
“While the demand and revenue landscape is the best we’ve seen, the operational environment for the entire industry remains uniquely challenged,” Bastian said on a call with industry analysts and reporters.
Delta, the first major U.S. airline to report financial results for the second quarter, said Wednesday that it had a profit of $735 million in the three months that ended in June and that it expected steady demand into the winter. But it also reported high costs, driven in part by investments in improving operations.
The cost concerns appear to have been the major factor in a decline in share prices for most of the big carriers Wednesday. Delta shares were down 4.5%.
The aviation industry has broadly struggled to maintain smooth operations over the past year, as staffing shortfalls compounded the turmoil from bad weather and other disruptions. Delta, for example, canceled about 3% of its flights last month, second only to American, which canceled 5%, according to FlightAware, a flight-tracking website.
The problems aren’t limited to the carriers. Heathrow Airport, in London, said this week that such shortages had led to long lines, delays, lost luggage and last-minute flight cancellations. As a result, it said, it will limit the number of passengers who cycle through the airport each day until mid-September.
Airlines and airports are hiring workers as quickly as they can to better meet demand. In the United States, airlines have hired more pilots this year than in any full year in at least three decades, according to Future & Active Pilot Advisors, a career consulting firm for pilots.
Delta said it had hired more than 18,000 employees since the start of 2021, restoring its workforce to about 95% of the size it was in 2019. But even then, training bottlenecks have prevented airlines from putting hires to work right away. At Delta, thousands are in the hiring, orientation or training process, Delta’s chief financial officer, Dan Janki, said on the call.
Such problems have challenged the industry’s ability to capitalize on one of the busiest periods for travel in years. A daily average of nearly 2.3 million people has been screened at airport security checkpoints since the beginning of June, according to Transportation Security Administration data. That figure is still down about 11% from a similar period in 2019, but up about 17% from last year.
“We’ve never been in an environment where capacity has been constrained in the way it is today and unable to meet the demand that’s out there,” said Dan Akins, an aviation economist with Flightpath Economics, a consulting firm.
Airlines have made cutbacks to ensure they have the resources and workers on hand to avoid widespread delays and cancellations. In May, for example, carriers slashed about 2.5% of the domestic flights they had scheduled for June through August, according to Cirium, an aviation data provider.
Delta’s recent decision to limit capacity reflects greater constraint than any of its peers: The airline is offering fewer flights and seats from July through September, relative to its schedule over the same months in 2019, than any other major U.S. airline, according to Cirium.
Still, Delta’s leadership is optimistic about the months ahead, saying the airline expects to report a “meaningful” profit this year.
Leisure travel is expected to follow seasonal patterns and slow down this fall, but Delta said it was optimistic that the decline would be offset by increased corporate and international travel, two profit centers that have lagged in the recovery.
American Airlines this week offered a preview of its own second-quarter results, saying it expected overall revenue to be up about 12% from the same quarter in 2019, although it said costs would be higher, too. Delta’s operating revenue in the quarter, $13.8 billion, was up about 10% from the same quarter in 2019. American and United Airlines are scheduled to report financial results next week, and Southwest Airlines later this month.
While strong demand has been a boon to the industry, its recent struggles have left consumers frustrated. Some relief may be coming, though: Air travel was among the few goods and services whose prices declined in June from the month before, the Bureau of Labor Statistics said Wednesday.
After falling somewhat from a May peak, the average price for a domestic flight is $310, up about 16% from the same time in 2019, according to Hopper, a travel booking and price-tracking app. The average fare for an international flight is $827, up 26% from 2019.
Airlines may be limited in how much they can lower fares, too. The industry has benefited from higher ticket prices, but airlines are still far from collecting the profits they reported in 2019. Delta, for example, said its operating margin, a measure of profitability, was 11% in the second quarter of this year, down from 17% in the same period in 2019. For the third quarter, Delta expects to report an operating margin of 11% to 13%.
“Their profits are still below where they were,” said Helane Becker, a managing director and senior analyst at Cowen, an investment bank. “They have all these inflationary costs, higher fuel costs, higher labor costs, higher everything costs.”