Analysis: US airlines eliminate change fees — and thousands of jobs
Posted - September 8, 2020
Delta Air Lines, American Airlines and Alaska Airlines (NYSE: ALK) followed United Airlines’ (NASDAQ: UAL) lead on Sunday in permanently eliminating unpopular fees for changing reservations on all but the cheapest tickets. The moves are the latest survival tactic by airlines, which are planning to involuntarily furlough tens of thousands of workers next month without further government aid.
Domestic leisure bookings marginally improved in the past week, down 52% from a year ago compared to 55% the prior week, according to Bank of America research. Bookings are almost back to the level of late June, before a spike in COVID-19 cases damped travel activity for several weeks. But airlines are expecting less business as the summer vacation season ends and business travel remains in the ditch.
Passenger volumes are down 70% and airlines don’t expect passenger traffic to come back until a vaccine is fully available. Actual passenger throughput flattened out in the second half of August, leading many to suggest there is a ceiling to travel growth absent a medical breakthrough. Analysts predict it will take at least three years for a complete recovery. More lucrative corporate travel is down about 90% and could take even longer to return to 2019 levels.
International travel is also expected to lag domestic markets.
On Tuesday, the International Air Transport Association released figures for July showing international passenger demand was down 91.9% compared to the same month last year — a slight improvement from the 96.8% contraction the industry recorded in June. International capacity fell 85.2% year-over-year. Overall, global passenger demand was only a fifth of last year’s level. Domestic markets, notably in China and Russia, drove a six-point improvement from June.
The air cargo sector closely watches international passenger schedules because they typically employ large, twin-aisle planes that carry significant amounts of freight in the lower hold.
Last week’s news that Abbott Laboratories has developed a $5 at-home COVID-19 antigen test that produces results in 15 minutes could marginally bump up domestic air travel in the near term, Cowen equity analyst Helane Becker wrote in a recent client note. The U.S. Department of Health and Human Services plans to buy 150 million of the rapid tests and begin delivery this month, ramping up to 50 million per month starting in October.
The policy change on change fees is designed to attract customers by giving them flexibility when many people are holding back from travel because of uncertainty and fear associated with the spread of the coronavirus. It applies to domestic travel. Delta and United include travel to Puerto Rico and the U.S. Virgin Islands, but American went further in eliminating change fees for Canada, Mexico and the Caribbean.
Change fees represent 2% to 4% of revenue, depending on the airline, according to Becker. She suggested airlines will later raise fares to compensate for the loss, which customers will likely accept better than change fees. Other analysts say airlines will make up the lost revenue with other fees, such as for enhanced cleaning, MarketWatch reports.
In addition to new marketing strategies and deep cleaning aircraft, carriers are also requiring face masks and trying to keep passengers spread out on board. And they are downsizing to conserve cash and planning job cuts because they have more workers than needed.
In total, airlines have warned 76,000 employees their jobs could be in jeopardy when government payroll assistance runs out and they are no longer committed to preserving jobs. The number of furloughs could be less if more workers accept voluntary separation deals.
Delta is nonunion, except for its pilots, so it was able to reduce work hours and adjust work schedules much faster than competitors. It had 91,000 employees to start the year and is down to 51,500 now, according to Becker.
Airlines and unions are lobbying for a six-month extension of the $50 billion payroll support program. Although an airline relief package has wide support in Congress, the parties are at loggerheads over the size and scope of a broader economic stimulus.
“The only thing that will get people back on the road is the government lifting quarantine restrictions, governments opening restaurants and tourist attractions safely, of course, and companies calling their employees back to work,” Becker said. “Without any of that, nothing will change by March 31.”
Airlines are taking different approaches to how they manage capacity. American, Southwest, Allegiant and Spirit are maintaining flight schedules as long as possible and making adjustments closer to the travel date, while Delta, United, Alaska and JetBlue are taking a more aggressive approach by reducing capacity early to limit cash burn, Becker said.
To the north, WestJet complained that a new surcharge from Canada’s air traffic control operator will hurt the airline industry’s effort to recover from the collapse in business since the novel coronavirus outbreak. NAV CANADA is increasing rates by almost 30%, forcing WestJet to increase ticket prices by US$3 to $5.35. WestJet said it is absorbing some of the increase because the actual rate increase is $4.60 to $6.90 per passenger. WestJet said it is considering an appeal of the rate increase, which it says will discourage travelers from booking tickets during a period of uncertainty.
The air traffic fees are one more burden for Canadian airlines, which have not received any direct assistance from the Canadian government so far during the pandemic. Other countries have taken steps to limit or defer costs to the aviation sector. The U.S. Congress, for example, suspended collection of excise taxes paid by passengers that go into the aviation trust fund, as part of its airline bailout last spring. Meanwhile, some Canadian airports have indicated they are increasing Airport Improvement Fees by as much as 52%.