Airlines analyst: Inflation could lead to ‘higher ticket prices’ in 2022

Cowen Senior Research Analyst Helane Becker joins Yahoo Finance Live to discuss the recent trend in domestic flight cancellations due to Omicron and weather concerns, inflation affecting ticket prices, and the outlook for airlines going into 2022.

Video Transcript

- Helane, nice to see you here. Look, the industry is one hot mess right now. How messy do you think the fourth quarters and the first quarters will be for these airlines?

HELANE BECKER: Yeah, well, first of all, Brian, thank you for your kind words, and thanks for having me on this morning. So I think the fourth quarter started out sort of OK. I think people are shrugging off the omicron variant at this point. I think every time one of these variants occurs, every one-- every success of one hasn't been quite as bad as the one prior, and demand is still strong. I think people were willing to give up last Christmas, but they weren't going to do it two years in a row. So that's the way to think about this.

Now, the hot mess that you're talking about, all the flight cancellations this week and winter weather out on the West Coast, as well as other issues, I guess we shouldn't be too surprised that we've had flight cancellations because of COVID among the crew members because it's run through the population of the US. So why wouldn't it run through crew members, as well, even if we're all vaccinated? But so I think the fourth quarter is kind of going to be OK, with the caveat that we'll likely get some warnings because of flight cancellations and winter weather, probably next week as the companies start to close their books.

I mean, think like Alaska Air out on the West Coast. They're having some big issues with weather, higher de-icing costs, flight cancellations. And then first quarter, the first quarter is always the toughest quarter because you always have bad weather in January and February. We always figure we're going to have bad weather. I mean, that goes without saying. And then we usually factor in a bit of a pickup the end of February, right after President's Day week and-- or weekend, and then spring breaks in March and into April. So that's good, obviously, on the demand side.

I think the way we're thinking about 2022 is inflationary pressure on fuel cost and labor cost, and then offset by two or three years now worth of demand, and not as much capacity. I mean, capacity is still down about 20% versus pre-pandemic levels. And so that would argue for higher ticket prices as we get into the meat of 2022, so, say, second and third quarters.

- Helane, I want to go back to your cancellation chart for just a moment, just to put this in perspective here, because I thought this was really interesting, just showing that 2013 was an awful year for cancellations, and this holiday season, by contrast, they're starting to add up, but still not as bad as it was. Like, how do you factor this in, then, to your financial models, these cancellations? What kind of impact do they tend to have in terms of the effect on earnings? And do you tend to see cancellations by the airline feed on cancellations by the fliers?

HELANE BECKER: So that's a lot--

- Or lead to, I should say.

HELANE BECKER: --Julie.

- Sorry.

HELANE BECKER: So-- that's OK. So that chart that you just put up was one that we captured holiday travel this week, specifically. So 2013 was a particularly bad year. And I went back and looked, and it was weather-related. And that was very impactful.

So when you think about the first part of your question, so we have weather-related issues that are causing airlines to either delay or cancel flights. And those cancellations are coming at a point in time where people have already started their trip and have to get back. So that's not going to lead to a cancellation by the flier.

Where you may have cancellations by the fliers is if they haven't started their trip and their flight is canceled and they were only going for three or four days to begin with, like a long weekend for skiing or fun in the sun or something like that, that's the risk that they cancel, that that flier will cancel, because, well, I can't get there today, and I'm only spending three days. There's no point in my going. I'll just go another time. So you have a postponed trip.

As far as the impact on the numbers, so we raise our costs for de-icing, as I mentioned, several times, and then maybe lower our cost for fuel. I think some of the airlines are trying to replace smaller aircraft with larger aircraft if they have the crews available and the aircraft available, especially in hubs. That's really where you have a lot of flexibility as an airline. And then the other thing, I saw this morning, actually, that JetBlue was canceling a lot of flights proactively over the next couple of weeks. United's done that. Southwest has done a little bit of that.

The idea is to get ahead of it. So they notify you three or four days in advance and say, by the way, we are not going to be able to fly this particular flight at, whatever, 7:00 in the morning, but you can take one at 9:00 or 10:00 in the morning, and do you still want that. And so the impact of that in the end-- I mean, it runs-- I guess the one point number that you're looking for, it runs into the millions of dollars, but it doesn't run into the tens of millions of dollars, unless it lasts for a very long period of time.

- Helane, I saw a good stat from you on another outfit, noting that the industry has to hire 35,000 to 40,000 pilots over the next decade. Is that right?

HELANE BECKER: Yes. Yeah, so the way to think-- again, the way to think about that is we have all these pilots who came on staff in the 1980s, and they're approaching 65. And I don't know if people are aware, but mandatory retirement age for pilots is 65. And that's not a surprise. You know the day you're going to turn 65. Everybody knows that day.

And many pilots will retire between 62 and 63 anyway. So you had this situation where American was going to have, out of their base of about 15,500, give or take a couple hundred, they were going to have about 9,000 pilots retired this decade. Amer-- United, rather-- was going to have about 7,000, I want to say, and Delta also about 6,000 or 7,000. So we were going to see, just from those airlines alone-- excuse me-- this huge number of pilots retire.

Then you have to think about growth. Well, the industry is growing roughly 3% or 4% a year, so you add some pilots on top of that for growth. And then when you add it all up and you realize that the industry asked pilots who were turning 65 in 2020, '21 and '22 to think about retiring in 2020, they pulled forward that retirement. So you have this huge bubble now in the first half of the decade that you might not have seen until the middle part of the decade.

And so when you add it all up, you wind up with between 35,000 and 40,000 pilots to account for growth. And that's growth across the industry, not only the three airlines I mentioned, but growth at Southwest and Alaska, JetBlue, Frontier, Spirit. I mean, these-- those ultra-low-cost carriers are going to grow something like 12% or 15% a year. Southwest talks about growing 6% a year, and Alaska also talks about growing 4% to 8% a year.

So when you start adding this up, admittedly, there are more seats per departure in the aircraft are getting bigger, but you're also needing more pilots to replace those that are retiring. And where it's starting to manifest itself, which we haven't talked that much about--

- Sure.

HELANE BECKER: --when we've talked is in the regional airline industry, so the service to smaller cities. United's CEO said recently a couple of times, I've seen this a couple of times now in the last week or so, and as early as-- or as late, recently as today, they've got 100 regional aircraft on the ground because they don't have enough pilots to fly them. And that means service to smaller cities, right? They're not going to cancel service between Newark and Chicago or Chicago and London. They're going to cancel service between-- oh, this is a bad example, but bear with me-- Lansing, Michigan in Chicago, or--

- Sure.

HELANE BECKER: --you know, the smaller-- Omaha to Denver. That's the service that's going. And that's where we need more pilots.

- Well, to all our high school fans right now watching Yahoo Finance, you want a job at some point, train to become a pilot, because the job will probably be there. Let's leave it there for right now. Cowen's senior research analyst Helane Becker, happy new year to you. We'll check back with you soon.