At TD Cowen’s 16th Annual Global Transportation Conference, the prevailing theme was the recent restated guidance from several carriers for the third quarter in light of rising fuel prices but also the need to continue adding long-haul capacity.
Helane Becker provided a succinct overview of the first day of the conference, noting that airlines all expect strong international passenger demand with transatlantic performing well but with many most bullish on Pacific traffic coming back on stream. Becker writes: “United and Air Canada should benefit the most from the recovery in this market. Air Canada is well positioned to capture demand from business and VFR traffic associated with individuals who emigrated from Asia to North America.”
Concerns remain with the domestic market for US carriers, which Becker states are still grappling with “a lot of supply and a weary consumer”, noting that inflation should support growth in ancillary revenue per passenger over the long term, but adds that “we are likely closer to the limit near term”.
Airlines are also hinting at a return of business travel with “some green shoots around corporate travel demand” but better gauge on whether it can accelerate from its current range will be seen from October.
During the course of the conference, Becker interviewed outgoing CFO of United, Gerry Laderman. He shared his surprise that the airline industry – and business in general – found it difficult restarting after the pandemic. “The entire world underestimated issues like the labour shortages, the supply chain issues. I don't think we did a wonderful job as an entire world really managing that,” said Laderman, adding that there were many unexpected delays in the supply chain from the aircraft manufacturers that continues today. Ramping up capacity was also an issue for airlines, however, Laderman noted that United began the recovery ahead of the curve as they had not retired all of its widebody fleet since it had anticipated the rebound. United added capacity into Europe and into leisure destinations, which is only now being copied by rivals. “We added capacity where it was appropriate to add capacity,” said Laderman. “The rebound in Asia has been slower than the rebound transatlantic… [for] a combination of a number of factors.” By working with its alliance partners, United was able to quickly rightsize its capacity into their hubs and adding more cities, said Laderman.
Laderman also addressed the issue of aircraft financing compared to leasing. “For us, leasing is just another form of financing,” said Laderman. “When we look at lease versus buy, leasing versus raising EETC debt or other types of debt, we look at it over the full life of the aircraft. We're not that interested in taking on aircraft for 10 or 12 years. These are all core aircraft to the fleet. And so 20 to 30 years would be more of what we would think about. And once you look at it that way, it's rare for traditional operating leases to make sense.”
That said, Laderman added that the airline had recently closes some lease agreements to supplement United’s order book. “Where the manufacturers are sold out for a number of years, leasing companies have aircraft available closer in,” he said. “It's not a meaningful number of aircraft, but it helps supplement near term, [and provides] some opportunities to bring in some aircraft.”
Laderman is retiring at the end of this year and shared with Becker and the audience that the foremost lesson from his many years in the industry was the value of partnerships. “Not just the internal partnerships … but the partnerships with the OEMs, the partnership with Boeing, which I've had for over 35 years has been critical to our success in many ways. A partnership' is a two-way street. Boeing obviously has helped us a lot, but we've also been known to help Boeing as well and it's paid off huge dividends. The same thing with the other banks and pretty much anybody, is the value of partnerships and building those partnerships, [which] is all about trust. You can't walk in and expect the other party you're dealing with trust you on day one, but you can quickly kind of build that trust. But I think that's a critical component to succeeding in the job.”