Passenger traffic has rebounded strongly during the northern summer season, but airlines are approaching the winter months with renewed caution.

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Rush transcript:

David Casey:

Hello, everyone and thank you for joining us on Window Seat, our Aviation Week air transport podcast. I'm Routes Editor-in-Chief David Casey. So welcome on board. This week I'm joined by my colleagues Dave Stroud, Aviation Week Network’s managing director of strategy and consulting, and Aaron Karp, senior editor at Air Transport World. Great to be with you both and thank you for joining Window Seat. For many carriers around the world, the process of network planning in the two years that followed the onset of the pandemic became erratic as the crisis ripped up the rule book. In the pursuit of conserving cash and finding pockets of revenue, airlines were forced into making short term decisions and market experimentation. But now that government restrictions such as border closures and post-arrival quarantines are becoming a distant memory in many markets, air travel demand is soaring. After two years of lockdowns and border closures, people are taking the advantage of the freedom to travel.

David Casey:

The latest passenger figures from IATA show that traffic in July 2022 was up by 59% compared to a year earlier, and traffic globally is now about 75% of pre-crisis levels. Although there's been capacity constraints in some parts of the world during the northern summer season due to labor issues caused by the speed at which people return to travel, aviation's performance generally continues to be strong with some markets approaching pre-COVID levels. However, despite these positive signs, the war in Ukraine sent fuel prices skywards and inflation continues to rise. So with the northern winter season fast approaching, the outlook for the industry in the fourth quarter of 2022 and beyond remains more uncertain with some analysts predicting a tougher winter for the industry.

David Casey:

On this episode of Window Seat, we'll therefore be taking a look at where things stand with the post-pandemic recovery in air transport globally, discussing some of the near and long-term challenges and exploring how airline route networks are evolving. We'll also be looking ahead to Routes World, an event for airlines, airports, and tourism authorities to discuss new and existing air services, that's taking place in Las Vegas in October. So I'll come to you first, Dave. In your role with aviation consultancy ASM, you work with clients across the world to help them secure air service. What does the overall picture look like globally at the moment? Which regions are doing well? Which regions are lagging and has the traffic rebound perhaps surprised you in some ways?

Dave Stroud:

Thanks David and great to be with you on this week's podcast. I think as you said in your introduction, it's generally been, I would say, a pretty positive year in terms of the recovery, but you've already started to talk about the many headwinds that potentially are buffeting the industry. We, as you know, have clients all over the world and we do see those sort of differences in different markets and different geographies. Clearly our US business, our North America business has been quite strong. I think it's probably been the strongest recovery market globally, albeit the picture varies if you are in say a smaller regional city and community looking for our service versus one of the major hubs, and I think the impact of labor shortages, specifically pilots in those kind of markets, has made some of the recovery of our services a bit more challenging or it's made the challenge of building what frequency and giving the right extent of connectivity a bit more of a challenge.

Dave Stroud:

Europe has generally moved at a fast pace, probably trailing a little bit be behind the US and there are bright spots and opportunities and new things that have happened in the market. We've got the emergence of Play and Norse Atlantic, and JetBlue doing the new London services. Yes, there are these sort of bright spots and new things with new carriers starting to invigorate the market and give new impetus to various things going on. Asia is clearly the market that's lagged and has a slower recovery. COVID regulations have eased a lot later in those markets and particularly China, which I'm sure we're going on to talk about through this, is the one market that everybody's watching and its influence on not just the Asia-Pacific region, but the rest of the world will be important going forward. So on balance, I think it's been a fast recovery year. There are challenges around it, there are challenges ahead of us and it has been an interesting recovery time for redevelopment, absolutely.

David Casey:

Thanks for that, Dave. Yeah, as you said, we'll come on and talk a little bit more about China in a minute or so, but Aaron, next I want to come to you. Obviously, Dave just mentioned then that the US has seen that the strongest recovery of the market globally. Now you are based in the US and although there are challenges with pilot shortages, what is the sentiment as we enter the fourth quarter of the year? How has it been over the summer? Are carriers generally optimistic, would you say?

Aaron Karp:

I think there was a great summer, particularly in terms of demand with the caveat being there were a lot of operational challenges that made operations at US airports, just as in European airports, not very good this summer and a lot of dissatisfaction among passengers. I think in terms of demand environment and the ability to grow capacity, there's more uncertainty than there was earlier in the year and less optimism than there was earlier in the year. For example, Delta started the year saying they would be down 10% of 2019 capacity. Now they're saying they'll be down 15%. United thought they would be down 5% for the full year compared to 2019. Now they're saying they'll be down 13%. So you can see there's a bit of a drop off in expectations, especially going into the winter. And I think it can't be underestimated how much fuel prices are affecting airlines' capacity plans.

Aaron Karp:

Just to give you some numbers, Airlines for America put out some stats on fuel prices a couple weeks ago. For the US airlines, the average price of a gallon of jet fuel is now $3 and 26 cents. In 2021, it was $1 and 98 cents. In 2020, it was $1 and 43 cents. In 2019, it was just over $2. And in fact, this is the highest per gallon fuel price US airlines are paying this century. And so that is a huge potential headwind. Airlines for America in their presentation said it has a significant detrimental impact on capacity growth. So I think there is less optimism than there was a few months ago, but still a belief that things are on the upswing overall.

Aaron Karp:

And I think if you look at some of the route announcements that have been made recently, airlines are really starting to look ahead to the 2023 summer season and they see that as high demand, like this summer with better staffing, so more capability to operate more capacity. But I do think there's a lot of uncertainty going into the winter with fuel prices, with still catching up on hiring and training staff. And so I think optimism is down from where it was a few months ago.

David Casey:

Thanks for that, Aaron. So yeah, as you said, optimism clearly is falling from where it was a few months ago and we're going to come on to talk about the outlook for the winter season shortly. But just wanted to go back to what we were just saying earlier about Asia-Pacific region and how that has been the slowest to recover so far. Obviously, we've had significant travel restrictions, particularly in Japan and Hong Kong, but these are gradually being removed now. In Hong Kong, for example, there'll still be COVID tests, but passengers will no longer need to isolate in a hotel.

David Casey:

And we've recently talked on the podcast about the situation in China and it’s important to the recovery. As we know, zero-COVID policy had meant that international capacity remains at a fraction of what it was before the pandemic, but there do seem to be some tentative signs that the country is gradually reopening its borders and routes are resuming. We're starting to see some Chinese airlines adding back international destinations. Dave, do you expect any meaningful activity in this market before the end of the year, perhaps after the National Congress in October?

Dave Stroud:

Yeah, thanks, David. I think that's what we're all looking for and hoping for. I think, as you said, firstly, the COVID quarantine measures have been relaxed quite recently in many areas and not as stringent, albeit there's still some very local city controls going on in China that kind of impact that. We have seen recently albeit at reduced frequency of many of their destinations that used to operate to internationally being reinstated, certainly across Europe and across the Asia region. So frequency is not there yet in terms of that rebuild. So we're watching the Congress. I mean clearly it's such a congress about everything to do with China and all the industries and everything that goes on. So aviation will fall out of that and there may be a lag in terms of the aviation impacts and measures and new policies that come forward. But I think we're all looking at that as a moment where China will more fully engage with the international community again, I think going forward.

Dave Stroud:

And it will be such a stimulus for the rest of the region. Personally, I don't think we'll see a huge shift between now and the end of the year. I think it'll be next year when we start to see that impact flowing through in a meaningful way. But yes, it's got to be the backdrop that everybody's looking at across Asia-Pac and then globally as well. I mean some of the operations sort of trans North America and Europe and things are influenced right now by closure of China in effect, and those are the markets. So it'll be interesting to see as China starts to open, I think, as we go through 2023, will that change some of the network decisions and the route decisions of carriers and their kind of long-haul plans who are working in markets that they can do and hopefully doing reasonably well in them.

David Casey:

Thanks for that, Dave. We mentioned as well at the start Hong Kong, so the restrictions there were lifted a few days ago and Cathay Pacific has responded by saying it's going to significantly increase frequencies and destinations during October and November. What is the situation there at the minute, Aaron?

Aaron Karp:

Well, they for a long time where requiring an automatic quarantine for anyone that entered the country, no matter whether they were positive or not for COVID-19, regardless of whether they were vaccinated. And so that just destroyed travel demand to Hong Kong because I think Cathay was saying basically their traffic was students coming to Hong Kong because they were willing to quarantine, but no business person and no tourist or very few are going to go to a city where they're grounded for three days essentially. So that is being lifted and that has given Cathay Pacific a lot of optimism. I think one caution is that there was mentioned recently by IATA director general, Willie Walsh, was that a lot of airlines not only want to see their restrictions lifted but want to know that they won't be reimposed.

Aaron Karp:

And so I think there's still some trepidation for airlines about restoring capacity to Hong Kong because what happens a month from now if there's another variant or if there's a spike in cases and all of a sudden they shut things down again and airlines have allocated capacity? So I think there will be some caution in that regard. For the global network, it is good news obviously. Hong Kong opening, Japan reopening, Canada has ended all restrictions or will on October 1st. So you're really seeing the markets that were most hesitant to open up finally opening up.

David Casey:

Yeah, of course, that's great news obviously for the global industry. In terms of then the winter months, the northern winter season is going to be starting at the end of October, now we've had a much better summer than 2021 despite some of the challenges in scaling up to meet demand. But obviously the industry's been shaken by the high cost of fuel and staff shortages and now we're really starting to see household disposable incomes come under pressure from high inflation and soaring energy bills and added into that as well, we've got the threat of industrial action over pay and working conditions in some markets. So Dave, what is the outlook for the winter season from your perspective? Are we in for a tough winter then? I know Aaron said earlier about the uncertainty and the high cost of fuel and carriers like Delta and United are less optimistic than they perhaps were a few months ago. Are we in for a tough winter?

Dave Stroud:

I think in part we are or we should be prepared for that. I think Aaron's comment before around demand uncertainty or dropping confidence I think is a truth and I think is going to permeate certainly all of those northern-western hemisphere air markets. I think the impact of fuel cost, domestic inflation, recession, all of those things on individual demand decisions is probably yet to be felt. So as we go into the winter months, I think if there is discretionary travel concerns that people have or you can see the instinct of people, think, "Yeah, we'll pause that trip, this is a thing that we may not do." I think from corporate travel demand, that uncertainty will be there as well. And anyone who's traveled a fair bit on business will see the cost of air fares being very high and that's stimulated the sort of growth of premium products rather than necessarily business class products.

Dave Stroud:

And so I feel there that there's a lot of headwinds on demand, which would make for potentially a tough winter season ahead of us without doubt. Yeah, we kind of summarize where the focus of planning is moving I think, but it's right to feel that way and I don't think it'd be disaster. I think there's still a lot of latent demand out there in the market, but I think there'd be just caution of people where there's discretion will take stock of that and think domestically rather than just plowing ahead with travel that they may have done before.

David Casey:

Thanks for that. As a result then, do you expect carriers to become more risk-averse with their route planning? Are you seeing them just go after markets that were strong before the pandemic rather than being a little bit more experimental than as they were during the pandemic?

Dave Stroud:

Yeah, I totally agree with that. As we saw in the pandemic, there was really a whole sort of experimental phase of airlines operating largely to places that they could because borders were open. It was a real way of testing markets, trying new things. That for me feels like it's very much dropped away. Airlines are playing much safer, far more risk-averse. I think it feels more challenging at the moment for those that were aspiring to get air service in perhaps thinner markets to actually make that happen right now. And I think the other pressure that we are seeing hugely with our clients and destinations particularly is the pressure of support, the pressure of that financial risk share that airlines are asking for.

Dave Stroud:

This has been around for a long time undoubtedly, but it does feel more so than ever there isn't a conversation you have with an airline about any new route or any service or reinstatement of the service or additional frequency, whatever that might be that isn't heavily demanding on route support and risk mitigation, measures, and those things. So I think that's here to stay and that's going to be here for quite some time. And Aaron's quoting the figures on fuel impact. You can understand it, the cost burden on airlines and the risk nature end is potentially demand uncertainty as well, that they are going to be in deep pressure to operate as risk-free as possible. And that places huge demands then on the destinations and cities that are looking for air service.

David Casey:

In terms of that cost burden then that we're likely to see this winter, what does that mean for passengers and are we going to see airline fares rise significantly this winter, do you think?

Aaron Karp:

I don't know if fairs will rise significantly. They're already at fairly high levels and I do think airlines, they're in a position because of cost where they can't lower fares too much. They have to pass on these costs to consumers. And so I think you see in the US particularly the low cost carriers trying to take advantage of that and you see some pretty big gaps in fares. But I think for the mainline carriers, they are really hyper-focused on costs right now. And because of that, I think they'll be very reluctant to drop fares too much and there's very little chance I think that fuel prices will lower this winter. And so I think airlines will be cautious and as I said before, I think there's a lot of looking ahead to next summer and getting through the winter and then adding a lot of new routes for the spring, summer of 2023 in the northern hemisphere. So I don't expect fares to go down anytime soon.

David Casey:

Thanks, Aaron. So Aaron mentioned then about airlines being hyper-focused on costs and Dave, you also in your point earlier said about how it's up to the destination to work really hard to attract those air services now. In October, Routes World is taking place and for any of our listeners that don't know, it's a global event that'll bring together hundreds of airlines, airports, and tourist destinations to negotiate air services. So what kind of discussions therefore can we expect at Routes World would you say, Dave? I mean given that carriers are being more risk-averse, are they making bigger demands when it comes to level and type of incentive for example?

Dave Stroud:

Yeah, that's true. Absolutely, that's the case. I think going back to the start, this Routes event timed in October is incredibly well timed for next summer and this point that Aaron's making around this planning focus that airlines are on now. This is that moment of when routes lands and the conversations will all be about next summer. And as we said at the start, we do have new airlines entering the market. There are things happening around the industry that always, even in the worst of times for the industry, there is always opportunities for new routes and innovation. And I think demand is fundamentally still interested in aviation and the building of networks. But airlines face a difficult time. They are very cost conscious, trying to preserve margin, and they are pushing destinations to mitigate risks. So I think the scale of support in terms of the asks will be higher than ever before.

Dave Stroud:

And the nature of them, the sort of revenue guarantees and that risk partnerships between destinations, airports, and airlines will be in big demand. So that's going to be a flavor of the conversations, very much so. I think there will always be the presentation of market opportunities. In some ways, the best market data to present to an airline still goes back to 2019 because we haven't quite had that sort of four years of obviously a mature level of traffic again. Well, that's coming. So there will be those sort of more traditional presentations of what is our opportunity and can it be served. But I think much of the conversations will be dominated by how can these entities work together, collaborate financially, marketing, sales as a whole stakeholder group to make air services not just be launched but be successful. I think that's going to be a big theme of the events and I think airlines are going to be looking for that reassurance from their business partners, that they're in it together with them to get these air services off the ground, make them successful, and reap the benefits that they bring for the communities.

David Casey:

I'm certainly looking forward to attending Routes World and hopefully some of the conversations that come out of that event will have a massive impact on the global aviation industry next summer and hopefully by then, we'll be in a far better position than perhaps we are at the minute. Dave, Aaron, thank you for joining me today. It's always great to work with you and thanks to our producer, Alex Harrell. And thank you to our listeners for joining us. And if you enjoyed this episode, please like and subscribe on Apple podcast or wherever you listen. This is David Casey signing off from Window Seat.