Air travel is roaring back, but the surge in demand has been met by cancelled or delayed flights, long wait times and lost luggage. Greg Bonnell speaks to David Mau, Portfolio Manager, TD Asset Management, about his outlook for the sector amid the airport chaos and rising recession fears.
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- The airline industry was hit hard by the pandemic, but the return of travelers hasn't been a smooth ride either. Joining us now to discuss the outlook for the airlines amid what we're seeing at the airports, rising concerns about a recession on the horizon, David Mau, portfolio manager at TD Asset Management.
David, great to have you on the program. The airlines are such an interesting one, right? As we said right there on the intro, obviously, the, pandemic was very tough on the industry. Now people want to travel again. And they're running into a lot of difficulties. What's going on in there?
- Yeah, I mean, you put it exactly right. I mean, but the thing to understand is, it's not just the airline's fault, right? When you look at-- people have probably seen the pictures on the news of what's going on at Pearson, lineups around 400, 500 people deep and the baggage hall full of unclaimed bags. The airlines do bear a lot of the responsibility for it.
But there's the government agencies that are involved in running the airport as well, the guys that-- the agencies like the Customs and Border security, just the regular security lines to get through to your gate from where you check in. And then there's also the ground crews that are the responsibility of the airports, and as well as the contractors that the airlines contract out to for things like cleaning the airplane and making sure there's food on board.
All of those moving parts, they've all suffered, I guess, what you would call labor shortages because, at the beginning of the pandemic, when air travel almost completely stopped, a lot of those employees were put on furlough or laid off. And all of these different areas, they've all been slow to bring these employees back. And the ones that they have been able to bring back, maybe they're not as experienced as some of the employees that have left. So it's taken them a little bit longer to get up the curve and to ensure that all the operations are running smoothly as they used to.
- Now, as investors look into the airline space, how concerned should they be about the fact that there is a demand for travel again that just cannot be met for all the factors that you just laid out? Perhaps some people might even be turned off by travel by some of the images that they're seeing. This seems like a critical time. You want to make hay while the sun shines, but they can't make the hay.
- Yeah, you're right that they just can't handle the demand, the volume that's coming through. But the flipside is that the airlines have really increased ticket prices recently. So while volumes might be a little bit lower, your average ticket price is higher. So that kind of offsets each other. So the question is, how long can these higher ticket prices be sustained, right?
So inflation is really having an impact on people's personal budgets, whether it's gas or food prices or anything else like that. And we know that, in a recession, if there is potentially a recession around the corner, discretionary travel vacations are one of the first things that people cut out of their budget.
- Let's talk a bit about that. Obviously, it's not a done deal that we're entering a recession. Everyone's sort of got their bets on the odds of perhaps getting there, because the central banks are acting so aggressively to try to tamp down inflation. It makes me think, too, of the airline situation, what they're going through right now. You're like, let's get back to business. OK, we can't handle the volume of business because of all those factors you laid it out. And then you look on the horizon, and you're saying, well, is the economy going to turn sour? How much of is that a challenge for this industry right now?
- It's certainly a challenge. I mean, at this point, there are no indications at least that demand has been destroyed due to inflation or higher prices. But it's something that we-- certainly is worth watching as we move forward into the third and fourth quarters.
- Now, in normal times-- I guess normal times, it's hard to remember, but maybe life before the pandemic. If you're taking a look at the airline sector, obviously, their largest cost is just jet fuel itself. It's not been cheap in the energy space right now. What does that look like for the airlines? How are they grappling with that kind of pressure?
- Yeah, I mean, that's a really good point. I mean, for an average airline, fuel is going to constitute somewhere between 25% and 40% of an airline's operating cost, depending on the mix of the fleet that they have that they're operating.
So what that does is it creates a little bit of a sense of urgency for the airlines to bring in new planes, because new planes are much more fuel efficient compared to a plane that was manufactured 15, 20 years ago. A new plane might save an airline 25% to 30% on the cost of fuel, which is really good news for the airplane makers, guys like Boeing and Airbus, because that's going to create strong demand for new planes to come into the fleet.
- Let's talk about that opportunity, then, because we've been focusing on the airlines, the problems that everyone's having at the airports. You just said there, obviously, this is an environment where, OK, maybe there will be a push. I think today was at Delta. I think Delta just came out today and said it had put it in an order for some of Boeing's newer jets, which are supposed to be more fuel efficient.
- Yeah, so the Farnborough Air Show, which is a major industry event, is going on, actually, I think this week in England. And typically, what happens during these air shows is that airlines announce their new orders for the coming years. And the majority of these new orders will go to either Boeing or Airbus because there's really only two big air plane manufacturers in the world. If you're an airline and you want to order a new plane, you're kind of limited to either the Boeing product or the Airbus product.
So it's going to be an interesting few days at the air show. And we'll probably get more headlines coming out over the next couple of days about airline intentions in terms of their ordering and how they're planning for the future.
- Farnborough is obviously a huge industry event that captures a lot of headlines every year when it happens. How closely should investors be watching? I mean, historically, is this something investors need to stay on top of, or is it sort of more of an interesting thing?
- It is an interesting thing because it gives an indication of what the airline expects in terms of their own travel volumes and their growth strategy going forward. But it is a very global thing, so it's not just North American airlines. You've got the Asian airlines. You've got the European airlines. Obviously, Russia is not going to be a part of the airplane ordering process, at least currently. But it does give you a good global perspective on how airlines are planning for their future.
- Longer term-- obviously, we've had near-term disruptions because of COVID that we're hoping, for the most part, the worst of it is behind us. We cross our fingers on that. We may, perhaps, have some near-term challenges if the economy slows or falls into recession. But we don't know the outcome of that. If we're talking now five, 10, 15 years out, how should we be thinking about the airline industry?
- Generally, I'm quite constructive on the airline industry. If you look at some of the predictions out there from the big industry players, they're projecting a need for over 40,000 new passenger planes over the next 20 years. And that's going to be a mix of replacement planes for planes that are coming out of there, too old to operate and they're going to come out of the fleet. And then there's also going to be a portion that goes towards new growth.
So we expect the airline industry to continue to grow. If we look back at the last kind of pre-pandemic kind of five to eight years, airline passenger traffic growth was 5% to 6% annually. The forecast going forward, it's a little bit lower. It might be somewhere between 4% and 5%. But that's still pretty good top line growth.
And that's very predictable because as air travel becomes more accessible to more people when you think about countries in Africa or Southeast Asia, where, traditionally, they were a little bit priced out of the market because it's not cheap to fly, but as airfares have come down over time, let's say the last 10 or 20 years, it's become a lot more accessible to a lot more people. So we expect that kind of growth to continue for the next 20, 30, 40 years.
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