For more than a year, the COVID-19 pandemic has kept most Americans cooped up at home. There is a light at the end of the tunnel, though: More than half of U.S. adults have received at least one dose of a COVID-19 vaccine. That’s driving a recovery in air travel demand.
American Airlines (NASDAQ:AAL) hopes to tap into this demand rebound by restoring most of its pre-pandemic flying by the summer. However, business travel demand is unlikely to recover that soon. As a result, the airline giant risks making another unforced error with this aggressive move.
Demand is returning
Air travel demand has increased dramatically over the past two months or so as the COVID-19 vaccination campaign has gained steam. Last week, passenger screenings at TSA checkpoints averaged 58% of 2019 levels, up from just 38% of 2019 levels in the first seven days of February.
All signs point toward even stronger demand over the summer. American Airlines and its peers all reported big inflections in their cash flow last month as leisure customers began to book travel for the upcoming peak season. In fact, American told investors late last month that net bookings were averaging 90% of 2019 levels.
Restoring most capacity
As demand has started to recover over the past few months, American Airlines has announced a series of capacity expansions.
For example, it is growing in Miami, capitalizing on a surge in demand for leisure travel to South Florida and to destinations in the Caribbean and Latin America that it serves from its Miami hub. The full-service airline is also launching new routes from New York and Boston, where it recently inaugurated a partnership with JetBlue Airways. Last month, American announced a slew of new routes from Austin, where the local economy is booming.
Last week, American Airlines rolled out yet another set of new routes. The carrier is also ramping up capacity on many existing domestic and short-haul international routes to well beyond 2019 levels in response to strong leisure demand. That includes redeploying many wide-body planes — typically used for long-haul flights — to domestic routes.
All told, American says that it “expects to fly more than 90% of its domestic seat capacity compared to summer 2019 and 80% of its international seat capacity compared to 2019” during the upcoming peak season.
Can leisure demand support this flying?
While leisure demand is recovering rapidly, leisure travelers tend to be far more price sensitive than business travelers. To be fair, the combination of high savings rates over the past year and cabin fever could make leisure travelers willing to spend a little more on airfares this summer. Still, it’s doubtful that leisure fares will rise enough to offset the impact of muted business travel demand on average fares and profitability.
Indeed, Delta Air Lines (NYSE:DAL) President Glen Hauenstein told investors last week that summer leisure fares would likely be similar to 2019 levels. Moreover, Delta reported that corporate travel volumes were still down 80% from 2019 in the month of March — even though the airline has gained share in that market segment.
Based on this demand environment, Delta expects to ramp up capacity to 67% of 2019 levels in the month of June. United Airlines is currently planning an even more conservative June schedule. American Airlines’ approach looks extremely aggressive by comparison. It anticipates operating more than 80% of its 2019 capacity by June, with further increases in July.
A risky approach
In its recent guidance update, American Airlines projected that it will report an adjusted net loss between $2.7 billion and $2.8 billion for the first quarter. That would be significantly worse than Delta’s Q1 adjusted net loss of $2.3 billion.
Generally speaking, businesses with higher profit margins have more reason to grow than those with inferior margins. American Airlines remains one of the least-profitable U.S. airlines, making its plan to restore capacity much faster than rivals especially dubious.
Moreover, American Airlines’ plans for the upcoming summer season mirror its strategy a year ago. The carrier operated an aggressive summer schedule in the hope of capitalizing on a modest leisure travel revival. The strategy backfired spectacularly, as American posted the biggest loss and the highest cash burn in the industry during the third quarter of 2020.
Could this time be different? Sure. But given American Airlines’ poor track record, investors shouldn’t count on this summer capacity surge leading to strong financial performance relative to competitors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/04/20/american-airlines-ramps-up-capacity-for-the-summer/