Issue No. 873
Inside the JetBlue-Spirit Union
U.S. Airline Consolidation Moves Forward, Regulators Willing
Pushing Back: Inside the Issue
With many airlines having now reported their second quarter results, some clear trends are emerging. Most importantly, travel is back in a big way in all but a few markets, like China. On the other hand, high fuel prices are also back, though things are looking better for fuel as the current quarter unfolds.
Looking more closely at demand, leisure demand is substantially greater now than it was pre-crisis, fueled by an enormous pent-up desire to go places and see people. With the industry supply of workers, planes, and airport infrastructure struggling to adjust — keep in mind the many false starts over the past two years — second quarter demand often exceeded supply, which can only mean one thing: Higher fares. Indeed, industry unit revenues are higher today than they were pre-crisis, lifted as well by the need to recoup those higher fuel costs.
Many leisure travelers are willing to pay more for comfort and space, as the boom in premium economy demand suggests. Corporate travel still has a way to go before full recovery. But most airlines see encouraging improvement. Hedges played a major role in shaping second quarter outcomes, with those well protected against pricey fuel and pricey U.S. dollars generally performing well. None fared better than Southwest, with its armor-plated hedge shield. Ryanair in Europe posted solid springtime results too, while its unhedged rival Wizz Air stumbled badly.
Singapore Airlines was another standout performer. KLM’s financials were excellent. Copa and IndiGo are on the right track. Less happily, Japan Airlines, Gol, Hawaiian, and Air Canada were among the quarter’s loss-makers.
In other developments, cargo remains an important profit contributor to many carriers. Intercontinental demand is roaring back just like domestic demand, with northeast Asia again an exception. Loyalty plans are still prized assets. And operational woes in most markets are easing as airlines, airports, and other stakeholders adjust. Unfortunately, that’s often because airlines are cutting flights they’d rather operate, which leads to further upward pressure on fares, inferior schedules, and sub-optimal aircraft utilization. Underutilized assets, indeed, are central to the industry’s inflated non-fuel cost base as the autumn off-peak season approaches. Going forward, improving utilization and finding a way to grow capacity will be top of mind for carriers eager to lower unit costs.
There was plenty of other news last week, ranging from new developments in sustainable fuel adoption to new Airbus widebodies for Ethiopian. And of course, the biggest news of all this summer, at least in North America: The victory of JetBlue over Frontier in the battle to buy Spirit. Next comes the approval process. And if the Feds consent, thereafter comes the integration, always a thorny undertaking. Is JetBlue making the right move?
Airline Weekly Lounge Podcast
Southwest had a secret weapon in the second quarter: Its fuel hedges. That helped propel it to an impressive 17 percent operating margin. High oil prices pulled down the results of most other U.S. airlines during what was an otherwise strong quarter. Also, Edward Russell and Jay Shabat discuss what’s next for JetBlue and Spirit now that they’ve agreed to merge. Listen to this week’s episode to find out. A full archive of the 'Lounge is here.