Wednesday, July 15, 2020

One Way or Another, Expect More Capacity Cuts

In last week's post, we highlighted TSA screening data that hypothesized both a lopsided summer recovered and forecasted upcoming demand weaknesses for travel in August and September. Over the weekend, domestic carriers started to back off many of their recent capacity increases, as well as started reducing early fall capacity as well. 

While these capacity reductions, which we will discuss, look dire, it is important to remember that the fall capacity window still has a lot of fat to trim compared to the summer. What do I mean, well, if September were to fly today September 2020 would have 60% more seats flown vs. July 2020. Typically, September capacity decreases as summer travel wanes from a more leisure focus to more business or required travel.  Last year, the largest carriers flew 10% fewer seats in September compared to July. 

As we discussed last week, the summer recovery appears to be leisure-focused. Leisure dries up significantly starting in the first week of August and declines through September. So, with a lack of business-related bookings, there is little reason to expect significant growth in the fall.


On Tuesday, Delta had their first earnings call since everything came apart. In an interview on CNBC, Ed Bastian stated Delta sees similar trends. According to the interview, summer volumes are roughly 20-25% of average volume, mostly due to relatively good, but stalling, leisure demand. Business, on the other hand, is around 5%. It is unclear in the interview if he means business is 5% of total bookings or 5% of the previous year. 

In the last two weeks, airlines have started to decrease their capacity, but all of these cuts are targeting August through September. Even with these reductions, capacity does gradually increase from ~50% down year-over-year in early July, to 25-30% down year-over-year in early September.  After Labor Day, seats are flat to up, year-over-year. 

As we dig deeper into the August values, we notice that most of the network carriers are currently scheduled to fly with 40-50% fewer seats in August. Southwest is the outlier dragging the entire industry capacity up. Southwest is currently expected to be down *only* 10% in seats. Considering the continued delays from the MAX flying and general conservative nature of their leadership to product their balance sheet, this honestly surprises me. 

With generally all carriers stating demand has started to plateau, Southwest's off-trend capacity approach doesn't add up to me. While it would be possible that Southwest sees a higher traffic return than other carriers, I do not believe this to be the cause. When we isolated predominately Southwest airports (DAL, OAK, MDW, and HOU), TSA screened passengers are only recovered to -75% year-over-year. I cannot imagine being down 10% in seats for August is sustainable.  


But, compared to other carriers, Southwest might be completely stuck with this situation. For those that know the Southwest network well, it can be best described as a giant spaghetti monster. What do I mean? Southwest does not have hubs, nor are they exactly a point-to-point carrier either. This causes the carrier not to have hubs in which aircraft can be terminated without impacted multiple down-line flights. This is generally not as difficult at network carriers or nearly pure point-to-point carriers such as Allegiant. 

The picture above is 10 random Southwest planes operated on March 10, 2020. 

When the virus started to impact customer demand, all carriers were forced to make day-of cancellation decisions. This was expected, given the dramatic decline in customer demand. Southwest canceled over 50% of its scheduled flights throughout much of April 2020. While all carriers saw a ramp-up in day of cancellations as well; however, others were able to more immediately cut their scheduled flights while Southwest was more delayed until late April and May before they were able to enact sustained cuts. 

If Southwest has bet wrong on the August schedule, it would not surprise me to see a spike in day-of-cancellations throughout the month. 

But it is important to remember, too much capacity in the fall is not just a Southwest problem. All major carriers are running extremely hot with capacity immediately following Labor Day. With lagging demand, we should expect to see capacity cuts start rolling in soon. 

As these capacity are announced, which I believe we will hear updated guidance anytime now, it is essential to note that even substantial capacity reductions could still keep airlines larger than they were in June and July. Until then, we all wait uncomfortably together. 

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