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Travel rebound expected in 2022 as long as Omicron subsides

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Cowen Senior Research Analyst Helane Becker joins Yahoo Finance Live to discuss fourth quarter earnings for Southwest Airlines, airline sector recovery, airline market cap data, and the outlook for travel amidst the Omicron surge.

Video Transcript

- And fuel costs are one of the major challenges that airlines are facing. Southwest just reported its first quarterly operating profit since the start of the pandemic. As travel starts to rebound, still it warns of headwinds and a losing first quarter. Here with an assessment on the health of the airline sector is Helane Becker, Cowan Senior Research Analyst. Helane, thanks so much for being here.

So Southwest turned a profit of 68 million, but it expects a loss. JetBlue also reporting today and reported a loss of 129 million. American reported a loss of 921 million in the fourth quarter.

All are predicting weaker first quarters. So it seems like there's a familiar refrain that's happening here. I just want to get your report card on which airlines have been weathering all of the challenges better than some of the others.

HELANE BECKER: Thanks for the question. So yes, it's pretty consistent across the board. Everybody had similar results in the fourth quarter. And the quarter was impacted by the slow return to office of business workers, so that definitely impacted business travel during the quarter.

But we saw very strong Thanksgiving and a very equally strong end of year holiday season. And then, of course, as we entered the second week of the holidays and into January, Omicron started to infect not only the general public but all of the cruise, airport workers, and the like at the airlines. And so they started the quarter kind of in the whole, January, February, where normally the first six weeks of the quarter are normally tough anyway because you don't have a lot of leisure travel. And in a normal year, you'd see a strong business market that would offset that.

But, of course, with return to office delayed because of Omicron and continued winter weather in some places around the country where we normally get pretty severe winter weather, we're starting off with January and February expected to be money-losing. And then beginning around President's Day weekend, we start to see the increase in leisure travel. March always makes the quarter anyway and spring break in April, strength into May. I think everybody is hoping that the Omicron variant is in the rear-view around the country by then and people start to travel again.

I mean, we know there's lots of pent up demand and I think that's what you're hearing from all the airlines. I think in the end, it's going to come down too low costs and strong balance sheets. And you mentioned Southwest, JetBlue, Alaska Air all have fairly strong balance sheets. And while we're expecting March quarter losses, we're expecting all three of those companies to report profit in the second quarter. You mentioned American, we're not expecting them to have a profit until maybe the summer months. But it would take a big increase or rebound in international travel.

- Yeah, most of the airlines reporting that by this summer they do look to be profitable. What does success or failure in recovery look like to you and what are the biggest risks to margins right now?

HELANE BECKER: Yeah, another good question. So number one is fuel cost. Look at where it was a year ago, jet fuel was around $1.25-ish a gallon and now it's $2.25 a gallon and seemingly rising every day. So that's a major challenge. The second major challenge is labor costs.

We didn't talk a lot about that, but Southwest mentioned that they raise starting pay for entry level workers to $17 an hour from $15 an hour and that's another familiar refrain. All of the airlines are hiring quite a lot of people. Southwest said they're hiring in excess of I think they said 3-- I think they said, actually, 8,000 people. Alaska Air said 3,000, American said 18,000 and JetBlue said 5,000, rather.

So we're looking at significant hiring this year and that is definitely going to put pressure on margin. It's a combination of lots more people, which is obviously good for the industry in general, but higher wage rates, which may not be as good. And also, the airlines are offering incentive pay to encourage, is that the right word? People who work there to pick up extra trips when their colleagues call in sick because of COVID. I think Southwest talked a lot about that on their earnings call.

So when we think about margin pressure, we think about labor we think about fuel. Nobody's really talked about maintenance cost, but we know maintenance is an issue, especially getting spare parts, in some cases, if they're not in inventory. And then airport fees. So that's another big cost that airlines have been lamenting is higher airport costs. So it's going to be tough.

- Yeah, there's a tough road ahead. Helane, I want to ask you, more than 25,000 flights have been canceled since Christmas. We're expecting rough weather to come in parts of the Northeast this weekend. What are airlines having to do and which airlines have taken the step to sort of make sure that we don't end up in the same situation that we did over the holidays with that horrific scene with so many flights canceled and passengers literally stranded?

HELANE BECKER: Yeah, OK, so that's really hard. So there's two things to think about. One is the cancellations related to weather and the other, the cancellations related to Omicron. Now there's nothing in the airline can do with the latter because if you wake up in the morning and you're not feeling good and you're crew member and you call in sick, unless the aircraft is at a crew base, it's going to be hard to replace that person. If it's in the hub, they have a better chance of it right.

So Omicron is a whole other issue. So the five days, the CDC went to 5 days versus 10 days and that helped a lot. But the weather that you're talking about and you mentioned the storm that's supposed to be coming up I guess the East Coast this weekend, right? Tomorrow night into Saturday, the airlines really try very hard to get ahead of that. So if you have a flight tomorrow night or Saturday morning, they may have already emailed you and said, by the way, Karina, we know you're on this flight at 8:00 AM Saturday morning and we already know we're going to cancel it.

So we're going to offer you another opportunity. Maybe you can go Friday night, maybe you can go Sunday, maybe you can go Saturday night. And they try to get ahead of that to inconvenience as few people as possible.

Winter weather is actually better than pop up thunderstorms, which can wreak havoc with the network because you never know when they're going to appear or where. And certainly, much better than crew members getting ill while they're in the middle of a trip and having to cancel. So that's the best. That's the best we can do.

- OK, well, my daughter has a flight to Miami on Friday. I'll let you know how it goes, if her flight is canceled. But Helane Becker, Cowan Senior Research Analyst, thanks so much for your insight and stopping by today. Alexis?

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