“Party” over for US domestic yields

After a strong Covid recovery in 2022 for US domestic airlines, it appears that the ""party is over"" as yields were negative year-over-year in the fourth quarter of 2023. Bloomberg Intelligence senior aerospace/defence and airline analyst George Ferguson said during the Flyers, Makers & Buyers 2024 presentation that the “party started” through 2022 for US domestic airline yields. Ferguson said: “We’ve essentially slid back down to Earth here in the fourth quarter of 2023, where most of those yields are negative year-over-year”. With domestic being the largest market for US airlines, the trend is “hard to ignore” and “if things don’t well in domestic, it’s hard for profitability to be sustained.” Ferguson added that there is “probably too much capacity in the marketplace after the pandemic rebound.” As a result, fares are sliding and impacting profitability. “Capacity probably has to get cut as profitability falls.” Therefore, it will be worth looking to airline capacity, particularly in US domestic markets for 2024. Ferguson also highlighted that labour is one of the largest challenges in the aviation industry. He argued that commercial is “trying to ramp up [aircraft] production” along with defence as geopolitical tensions mount globally, but labour shortages are persisting. “We have a workforce that is less interested in aerospace… more interested in going to work for Amazon than they are to go work for the aerospace makers”. He also noted that pilot and labour costs are increasing both in the US and Europe, which follows several strikes announced by airline pilot and labour unions this year. Southwest Airlines pilots were approved a five year 44% pay increase in January 2024. Closely following this, Southwest Airlines flight attendants voted in favour of strike action. Globally, the supply chain will continue to have a large impact over aircraft value for 2024. Oriel ISTAT appraiser Olga Razzhivina said: “The single biggest factor and the formation of the [aircraft] values is the supply.” With low supply, lease rates will see a strong performance. She added that supply chain “outweighs everything else” in regards to factors impacting aircraft value. “We are seeing relatively strong recovery of lease rates compared to values because they tend to be a leading indicator in times of recovery,"" said Razzhivinia. She added: “Lease extensions are prevailing in the market at the moment.” She said the terms of lease extensions are also in lessors’ favour, stating that lease extensions are “not two, three years. They’re five, six years, and oftentimes the lease rates are either at or even above the level of the original lease”. Overall, this “bodes very well for lease rate recovery”.