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June 19, 2024

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This week, JP Morgan hosted its Industrials Conference, with several airlines presenting their thoughts and outlook on 2024 and beyond. This article summarizes some of the key findings from that conference.

The Network Carriers

Delta, United, American, and Southwest participated in the conference, each presenting current trends and updating their outlook. One key issue is Boeing and its ability to deliver aircraft.

As major Boeing customers, United, American, Southwest, and Alaska face scaling back planned growth due to continuing quality issues with the Boeing 737 MAX. Each of the major MAX customers faces additional delivery shortfalls in 2024 as Boeing struggles with supply chain and quality issues. That being said, the industry outlook remains positive for the major carriers.

Delta

Delta, represented by CEO Ed Bastian, President Glen Hauenstein, and CFO Dan Janki, presented a strong outlook. Delta reaffirmed its 1Q EPS guidance but indicated that it expects revenue growth to be at the top end of its range. The carriers achieved 9 of its 10 all-time sales days during the past 10 weeks.

International revenues at Delta, which some expected would falter, have instead grown for 2Q travel year to year and will be up low single digits over 2023 revenues that were 23% above 2019 with 2% lower capacity. Loyalty, international and premium traffic are driving Delta revenues, and the carriers plan to pay down debt and de-leverage the balance sheet should reach the goal of 2.5x adjusted debt/EBITDAR by the end of 2024.

Delta believes that legacy carriers are well positioned versus LCCs due to structural changes in the industry and expects to continue its industry leadership in 2024, with corporate traffic now nearly fully restore to pre-2019 levels.

United

United, represented by CEO Scott Kirby and CFO Mike Leskinen. While the carrier did not offer an update, the discussion focused on the key items that should aid the carrier’s valuation. The first is that profitability is both more sustainable and less cyclical, given the growth of premium and ancillary revenues. Second, United’s high growth strategy, including its mid-continent presence and up-gauge strategy that will help CASM. Third, the carrier has improved the flow of earnings to free cash flow.

United’s strategy is paying off, with UAL not becoming the top choice for three types of customers: the premium traveler, the domestic road warrior, and price-sensitive customers. By removing RJs for larger aircraft, United is better able to offer low-price tickets and take revenue from ULCC competitors. Combined with premium and business strength, this generates higher PRASM numbers.

The Boeing delays have caused United, which also operates the A321neo, to seek more of those aircraft to offset Boeing’s inability to deliver the higher gauge airplanes needed in the United Next strategy.

American

CEO Bob Isom and CFO Devon May provided guidance on the 1Q 2024 results, reaffirming ASM growth, TRASM, and CASM guidance but a lower range of earnings due to higher fuel prices. American affirmed the targets revealed at their investor day earlier this month and noted that normalization of revenue to GDP ratios presents a potential upside not incorporated in their guidance.

American is working on updating its loyalty credit card agreements, as it lags behind Delta and United, but it has not announced a date that would close the gap. That presents another opportunity for an upside to its 2024 guidance. While United has an up-gauging strategy and is retiring regional jets, American just placed an order for up to 155 Embraer E175 jets, as it is counting on smaller markets in its strategy. Time will tell whether the United or American strategy will come out on top.

America reaffirmed strong demand, tight capacity, consumers favoring experiences, and solid operating performance, with a positive outlook for 2024.


Southwest

CEO Bob Jordan and CFO Tammy Romo presented a different outlook than the other three majors. 1Q24 RASM was lowered by 2.5 pts because better-than-anticipated completion factors resulted in more ASMs amid softer close-in leisure volume. Management is seeing higher-than-seasonal norms for RASM for the remainder of the year, which should restore some of the share losses after the aforementioned adjustment.

The Boeing delays, currently calling for 46 rather than 58 airplanes, will cost the carrier capacity growth. The company is stopping pilot and flight attendant hiring classes in April and will target avoiding additional maintenance costs with the existing fleet. Network optimization and better matching capacity to day-of-the-week traffic levels will lead to wider and near 15% swings in capacity between peak and valley days.

Southwest remains wedded to its single fleet type strategy despite the quality problems with the Boeing 737 MAX. With the rapid certification of the 737 MAX 7 now unlikely, Southwest faces additional growth with aircraft that are too large for many of its markets and less profitable than a right-sized fleet.

Southwest’s presentation was quite different from last year, when the carrier faced the aftermath of a holiday season meltdown and we learned about its successful plans to prevent a recurrence..

The Second Tier

Alaska, JetBlue, and Frontier comprise the second tier of US carriers at the forum, and Air Canada also presented at the conference.

Alaska

CEO Ben Minicucci discussed Alaska’s strategy and proposed merger with Hawaiian, and provided an update that reduced projected 1Q24 losses by about half of the street concensus. Alaska is seeing improved business travel trends, with key customers Amazon and Microsoft approaching 2019 levels. Alaska reiterated its long-term pre-tax operating margin forecast of 11-13% for 2024.

The proposed merger, despite the JetBlue/Spirit merger denial, may be positive for the Alaska/Hawaiian merger because there is very little route overlap, and only two of the top 25 cities are not dominated by the big four. Maintaining the Hawaiian brand and providing connecting options could improve competitiveness.

JetBlue
CEO Joanna Geraghty, CFO Ursula Hurly, and Revenue and Planning’s Dave Clark presented at the JP Morgan conference.

After the merger with Spirit was not approved, jetBlue is “re-pivoting” and planning to reveal its strategy at an investor day on May 30th. In the interim, the company updated its 1Q24 guidance, raising ASM growth, revenue, and CASM also improving 1 point. With the merger now off, JetBlue is re-evaluating markets and rationalizing operations as appropriate.

The company is deferring aircraft deliveries, including a number of Airbus A321neo aircraft that are in high demand, and will not take on 80 new aircraft. One would think that, with United seeking an A321 aircraft, Airbus won’t lose a beat. Instead, jetBlue will extend the life of existing A320ceo aircraft, extending their service life.

JetBlue’s New York hub is subject to ATC delays, and the carrier is looking at rationalizing operations at JFK and LGA. In 2024, JetBlue will take a step backward as it reworks its strategy without the Spirit merger to a stand-alone operation.

Frontier Holdings

CEO Barry Biffle discussed Frontier’s strategy to hit mid-double-digit margins in 2025 and industry dynamics. He indicated that the ULCCs’ capacity is oversupplying key markets, including Las Vegas and Orlando, but he believes that opportunities exist for all business models, including more regional routes for ULCCs.

He also indicated that Frontier continues to reduce its CASM relative to piers as its fleet moves to more efficient A321neo models. With a new pilot deal coming, Biffle mentioned that cost convergence in the industry may be misplaced with respect to Frontier.

Frontier also announced a new Up Front plus seating option that blocks middle seats, much like European business class, which could diversify its revenue streams.

Air Canada

CFO John Di Bert spoke about Air Canada’s fleet strategy and the A321XLR aircraft slated for transatlantic operations. Premium traffic is up 27% from pre-pandemic levels, international travel has grown 25% since 2019, and Aeroplan membership has doubled since the airline reacquired it in 2019. These are the same drivers leading the US network carriers, with Air Canada being their smaller but similar competitor from the north.

With smaller markets, the ULCC business model hasn’t worked well in Canada despite several new entrants and subsequent failures. Looking forward, Air Canada, Westjet, and Porter have the strongest positions, with LCC and ULCC entrants having issues with overcapacity in Canada’s smaller markets and the investment required to utilize Canadian airports.

Air Canada is right-sizing its operations domestically with the A220s and internationally with the A321XLR to maintain yields and profitability in key markets.


The Bottom Line

The industry has a positive story to tell in 2024 but has not seen the market value in its performance compared to pre-pandemic rules of thumb. The key question is whether this is an opportunity for share price growth in 2024 as more consistent success becomes routine. We believe it will, particularly during the historically profitable second and third quarters.


While the Boeing delays may get worse from those already announced, the industry should be able to weather the storm, keeping older aircraft in service longer and dynamically pricing fares to the supply-demand balance in each market. With higher demand, the airlines are in a favorable position despite supply issues short of a shutdown of MAX production at Boeing.

author avatar
Ernest Arvai
President AirInsight Group LLC

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