Air Canada and Air France are the latest major carriers to raise concerns about meeting revenue targets issued for the financial quarter. They join nearly half of US carriers and major cruise industry executives.
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Air Canada Revised Earnings, Faces Short Seller Pressure
Halfway through Q2 2024, Air Canada revised its earnings down from Q1 by $81MM CAD. That’s old news. This week, however, short sellers are targeting the carrier in a big way. Speculators are betting big that the airline, and as an indicator for the broader Canadian economy, are headed in the wrong direction.
“Short sellers are targeting Canada’s biggest publicly traded airline as investors expect rising operational costs and weaker post-pandemic consumer demand to weigh on growth.
Air Canada’s short interest as a percentage of float — a metric that measures how many traders sold shares compared to the total amount of stock available to trade — stood at nearly 19 per cent in early July, according to financial data firm S3 Partners LLC.” – Financial Post
Shorting a stock is not necessarily a confirmed signal of anything. Many companies have been the target of short-sellers without any broader financial implications. However, the Financial Post also notes the growth trajectory has changed for the Canadian economy:
“Preliminary economic data from Statistics Canada also points to flatter growth ahead as the agency predicts gross domestic product rose 0.1 percent in May, slower than the 0.3 percent expansion a month earlier.”
Combine the financial data, revision to Q1 2024 revenue, short seller activity, and the other market slowdowns and it seems clear where Air Canada and travel demand are headed.
Air France Also Lowers Revenue
Management for Air France announced a revision to its forecasted earnings at a time when many, including the airline’s own management, predicted packed planes and high fares.
“Air France and Transavia France are currently experiencing pressure on projected unit revenues for the summer season due to the upcoming Olympic Games in Paris, with traffic to and from the French capital lagging behind other major European cities.
International markets show a significant avoidance of Paris. Travel between the city and other destinations is also below the usual June-August average as residents in France seem to be postponing their holidays until after the Olympic Games or considering alternative travel plans.
As a result, Air France-KLM currently estimates a negative impact on its forthcoming unit revenues in an order of magnitude, from €160m – €180m for the period June until August 2024. This event has no impact on our guided capacity at this stage. More details will be provided during the Group’s half year results, on July 25th.”
Ben at OneMileAtATime discussed some of the struggles in more depth and echoed that some travelers, indeed, may avoid Paris this summer as a connection point.
“While the concept of an airline struggling due to massive demand to and from its hub seems counterintuitive, it actually makes a lot of sense.
Flights to and from Paris will likely be packed before and after the Olympics. However, it’s a different story during the Olympics. I’ve noticed this in my own flight searches, and have even seen a decent amount of award availability on Air France on dates during the Olympics.”
I can understand the logic; I don’t know that I personally would seek out Air France and Paris as a connection point for travel this summer. However, avoiding Paris for connections when leisure tickets are purchased months in advance seems like a very engaged and informed consumer. I’d argue that the average consumer searching for tickets from Chicago to Milan wouldn’t weigh events in Paris if they are merely switching plane. Choosing between Dublin, Frankfurt, London, or Paris it seems obvious to me that most consumers would decide on price and duration of the journey – little more.
Another Example Of Lower Travel Demand: Universal Studios Orlando Opens Up Additional Access
In yet another sign that travel demand is slowing unexpectedly, seasonal pass holders at Universal Studios Orlando got surprise emails this week expanding access to the parks during normal blockout periods July 8-21, 2024. Universal is not charging more though park entry for pass holders during these dates typically requires higher level pass costing hundreds of dollars more annually. Is this a case of generosity or limited crowds? Given the notice (just a few days before the special access period is to begin), it seems the latter is more likely. Is this yet another sign that travelers are pulling back, or has Universal simply looked to enhance benefits for its seasonal members?
Of note, for pass holders spent extra money for a higher level of access, I wonder if they will get added extras too.
How Many More Before It’s A Broader Problem?
Defenders of whatever this economy is will continue to excuse every lowered revenue announcement as specific to that brand, and that situation.
One reader cited Southwest and American’s lowered revenue as evidence of poorly run businesses. Southwest is fending off hostile investors who would agree the carrier is underperforming. If you frequent this site, American’s management isn’t winning any awards, let alone profits from flying people and cargo. Spirit has been derided as a clear indicator that the ULCC model is dead in the United States, even United CEO, Scott Kirby, said so – it must be true. JetBlue was trying to expand too fast in too many areas with an expensive cost basis and atrocious legal bills. As for the cruise industry, of course, they are seeing growth slowing, there’s too much inventory.
Adding in the flag carrier of Canada, and France can be whittled down to specific scenarios. Somehow, hosting the Summer Olympics is a detractor for connections more than the once-every-four-years event is a draw for travelers.
Universal is simply increasing access to the lowest-priced annual pass holder simply out of its own good nature and not to put more people through turnstiles.
Newsweek reported that almost half of US voters surveyed aren’t taking a summer vacation due to airfare costs:
“Polling conducted exclusively for Newsweek by Redfield & Wilton Strategies has found that 44 percent of Americans would be taking a summer holiday this year if traveling by air wasn’t so expensive. The survey was conducted on June 27 and June 28, sampling 2,500 eligible voters in the U.S.
Over the last year, the consumer price index for airline tickets has increased by 25 percent—the largest jump since Federal Reserve of St. Louis records began in 1989. In April, airfares jumped by 18.6 percent, according to the Bureau of Labor Statistics.” – Newsweek
These are canaries in a coal mine and they are dying off – how many before we agree there’s a problem?
Every one of these executive teams should have an explanation for their lack of performance other than “it’s the economy” because in many ways, the economy continues to counter cyclical norms and there are record travelers. There could be merit to some of the challenges. I love JetBlue’s ambition but failing on both the NEA and Spirit acquisition while simultaneously expanding throughout Europe amid an aircraft engine shortage was certainly too much. But much of that could have been overcome with record travelers. Despite covering this topic in the last few weeks and being called Chicken Little, others are taking notice echoing the same concerns:
“Travel analyst Henry Harteveldt told Business Insider that thinning margins are, in part, because airlines added too much to the market too fast amid confidence in the soaring demand and now can’t sell all of those seats…
However, Harteveldt noted these forced network shake-ups, like Southwest’s exit from four airports, could be beneficial for better leveraging airline pricing power, as capacity can be brought back in line with demand.
“The airlines should find and serve routes that are the most profitable, and that means they may need to increase capacity in some markets and completely exit others,” he said.” – Business Insider
Must we wait for Lufthansa to cite merger costs with ITA, and LATAM for an extended hurricane season in the Americas, EVA for geopolitical concerns in the region before conceding that there’s a problem? Can we just presume that compounding economic hardships is finally affecting the discretionary budget of travelers worldwide?
Conclusion
Two more flag carriers join the struggles of other industry peers with signs of diminished growth, lower revenue, and failing to meet expectations lending credence to the thought that forward travel demand is dropping more than expected. I contend that these are early indicators of a concerning financial predicament not just domestically in the United States but potentially globally. These may be all entirely unrelated, but it seems unlikely.
What do you think? Are these further red herrings or the first signs of a concerning shift in travel demand?
Easy solution : double their F and J fares .
Well , they can hire Joe-k Bi-done to explain things to them , but first they need t wake hm .
Can requests for wage concessions be far behind?
Let’s say you are right, Kyle. Though my personal belief is that you are cherry picking and each airline or company does have other factors given the forecasts seem different from one to another. But for the sake of debate, let’s assume travel on the whole IS approaching an industry wide slowdown.
First, I can’t imagine anyone who believed that revenge travel was permanent and that the numbers the past few years were sustainable. In fact, many of us have waited for this moment to once again relive sanity. I can’t believe it lasted this long.
If though it’s more related to a changing economy, isn’t that the intent of Interest rates being set where they are so as to lower inflation (which is happening)? Have you considered that this is the soft landing (in the U.S. at least) that the Fed has been working for?
Already we are seeing signs of these adjustments giving the Fed some breathing space to start lowering rates perhaps as soon as this fall. The correction is starting to happen. Which is what was needed. With that airlines need to prepare for a slow down for a few quarters and wait for rates to be lowered and travelers to see an adjustment to inflation, daily living, and credit card interest for travel. I’m sure the travel industry will be fine (well, maybe not AA but that’s their fault) as they have been piling up cash over the past few years.
So to me it sounds like you are touting the system working. The engine slowing, soft landing, lower inflation, lower rates and the result being another boom or sustainable cycle around the corner.
Is it your belief or your personal belief? What’s the difference?
@Stuart – Assuming I am right, let’s look again at your first point. The pilot contracts signed in the fever dream of revenge travel has such significant gains that I don’t believe they are functional outside of peak travel periods. I said that when they were signed, and my position hasn’t changed. Those contracts were so incredibly high that it seemed both then and in the light of day, now, that management did expect rates and traveler numbers to remain high or grow higher, otherwise they couldn’t possibly make the numbers work – especially American.
It is entirely possible that there’s an overall soft landing. Some aspects of the economy won’t be able to experience the same softness (commercial real estate) whereas energy costs have to reach an incredibly high number to see a declination of use.
To your last point, I’m not suggesting the system is working or not. What I am trying to reach is two things. First, the economic cycle has defied all traditional business norms which could mean a few things.
1) When the market doesn’t respond normally in accordance with economic levers (inflation goes up = discretionary spending goes down) then either we are in the midst of a sea change (possible following the pandemic just as there was a sea change with office occupation) and the old tools won’t work for new problems; or
2) Second, we are headed for a crash rather than a soft landing. Housing, and commercial real estate are likely lead indicators but in the travel space we could be seeing the first strokes of a drop in discretionary spending. The fact that projections had to be rewritten within the quarter says that it was more of a cliff or a wall hit than a gentle glide down.
What makes this so odd is that no one seems to admit that the emperor has no clothing. That’s the part I can’t square. They are all seeing the same thing and experiencing the same results but claiming it’s because of unrelated reasons when it’s clearly a drop in discretionary spending. Whether that means a soft or hard landing, it’s a landing all the same. So why pretend as though we are still flying high?
Let me go through your points and I appreciate the civil conversation.
1. I fully agree. I can’t find anyone who thinks the pilot contracts (or the FA contracts signed and coming) were/are a good idea. This is going to blow up soon and it won’t be necessarily a fault of the economy or a soft landing but rather because of extortion by these labor groups. However, you have not been isolating only the airline industry, you have mentioned also cruises (which I believe is a result of market over saturation) and Universal Studios (which is going to be primarily appealing to middle class Americans who, no doubt, are the most affected by inflation, credit card rates, etc.) Universal to me (and Disney whenever they release numbers) are far more telling given their demographic of clientele. And this group of consumers are clearly cutting back on travel compared to two years ago. To me that will bring the needed adjustment to the economy, the soft landing we need, and a restoration to normal inflation numbers. I see this as a sign that the Fed’s approach is working.
2. No economist in the world is arguing that any of what has occurred in the past few years since Covid is “normal”. What is being done is a worthy attempt (and it seems to be working) of getting to a “new normal.” Every business (including my own) has made unique adjustments to their plans since 2020. In many ways it is a seismic and permanent shift. Yes, commercial real estate is a mess. Not because of the economy, or even inflation – but because of changing workplace and shopping patterns. With that, the ugly step child: warehouses and industrial commercial, is the future. Or in the case of shopping malls, converting parking lots to pay-for-use pickle ball courts, lol. I am also betting on a number of commercial office buildings to go through conversions the next couple of years to apartments and hotels. The world changed. In this case, it’s not “the economy stupid” but a permanent disruption to societal patterns brought about by a pandemic that will affect an entire generation,
3. Sectors will crash. Of course. Commercial has been for a few years now. My banker told me that they have pretty much written off commercial loans for offices in downtown areas. But, he told me, that small office builds and warehouses in suburban and hybrid rural areas are doing very well. As to housing, the moment inflation is at normal rates and the landing occurs, rates will drop and housing will explode with pent up demand. Though I am in DC and slightly immune, I can assure you that still, even with rates as they are, not a single home or condo in my area has been on the market for more than a few days. If anything, when rates come down, will builders be able to build fast enough? It’s funny to me also, I was in Iowa last week working with clients. They are all complaining that Chicago residents are moving there and driving up home prices. The same people who two minutes before were telling me how awful the economy is for them and people are struggling (of course, later they shared with me the details of the $20K Alaska cruise they are going on this summer).
4. Energy. I have so much to say here. First, energy companies, are we really trusting them? I was in Houston and coincidentally staying at the Post Oak Hotel when Trump flew there to give a speech to Texas Energy industry executives. It was quite the sight of Bentleys and Lamborghinis at Valet parking. His promise, vote for him and he will remove all restrictions, lower taxes, and make them even wealthier. Really? Are we certain we can believe these billionaires that energy prices will be correctly priced? There is no good answer with Energy. We are handcuffed by these Oligarchs (in America and elsewhere) who control the most essential thing in our lives besides food. Give them more freedoms and less taxes is the answer? I think more regulations and perhaps the government becoming directly involved with these companies might be better for consumers. No doubt, it will be a big debate in the future. But maybe we can start at home. Americans are obscene with energy usage. Walking into a hotel room that has not been stayed in for days but is cooled to 62 degrees? Escalators running continuously despite no one on it for hours? Cheap disposable everything that people order for one time use and Amazon sends three different packages for $14 miracle creams? We are our own worst enemies. No wonder Texas energy sector billionaires are laughing and controlling us. We can’t control ourselves.
5. Lastly, food. Thankfully prices are coming down. Meat (other than chicken) is still pricey but I have an easy solution to this. Stop eating so damn much, America! You know why European restaurants are reasonable now compared to the U.S.? Because they serve portions that are reasonable for human beings. Do we really need a 16 ounce NY Strip and a bucket of mash potatoes for dinner? How about a 12 ounce and small side of vegetables? It’s a waste and, besides making for higher prices, it’s killing our population. Also, at home, Europeans buy mostly what they need each day, not filling shopping carts for a month. They are rational with controlling what they cook at home. Food is fresher, less waste in the end of impulse purchases, and healthier. Again, the result, consumption goes down and prices follow.
Stuart, excellent response / analogy in complete. do not know what industry you’re involved in but your observations are spot on. on every angle (including our abuse of electricity to our meal portions).
I no longer live in the States (Latin America) but I see in practice every day what you’ve outlined in your commentary.
kudos!
Paris CDG is not the most friendly airport to connect thru. Generally understaffed, and signage can be improved. The travel agency we use at my company has now a policy to not fly us on flights connecting at CDG. Too many employees have missed their connections, even when flights were on time, and even if some of us have the Fast Track service.
@Eric – That may be the case, but to miss so late in the quarter and by so much, it would take a lot of consumers that aren’t participating. Take the average flyer on Expedia who is trying to get to Milan for a trip with friends. Do you think they are taking into account connection ease or difficulty in evaluating Paris over Frankfurt or London? Probably not. They are probably looking at the price and the connection time.
Leisure travellers absolutely do factor these things in.
If you are going on a 5-day trip from Manchester to Athens, or from Copenhagen to Bilbao, you are definitely not going to feel under pressure to book it ‘months in advance’, particularly when you know there’s a risk of schedule changes messing up with your connections. When you know that transiting CDG is complicated at the best of times and that it’s also got to deal with the extra traffic, security etc resulting from the Olympics, you’ll pick MUC, ZRH, LIS or just about any other connection airport ahead of it. If you are only buying on the basis of price you’d be flying Ryanair or Wizz anyway, so AF can’t sell tickets cheap enough to fill the planes when they have to cover two sets of airport charges in each direction.
The flight from Chicago to CDG can probably pay its own way through the business class fares alone. The flight from Manchester, not so much.
Once again we have a joke of an economic analysis by Kyle Stewart. This is a airline blog, not a renowned news outlet (no offense Mathew!) nor journalist on the economy or economic activity.
At least Gary Leff doesn’t pretend he’s an expert telling us the truth, he just offers an opinion. Kyle Stewart is trying to present himself as a qualified expert, one that seems to not realise much.
Wow – someone is angry. Where do you see anyone claiming this is anything but an airline blog? I doubt Wall Street is coming here for analysis. But I enjoy viewpoints posted here and can take them for what I think they are worth. I believe most everyone else can too. They don’t need you to tell them what you think, If you don’t like it vote with your mouse and go somewhere else.
@David I am definitely not angry at Kyle, but I really don’t think that his analysis of airline financials hits the mark. He does have a reasonable amount of knowledge of theme parks and cruises, perhaps he should just focus on those.
Short sellers are not stupid. Historically, in times of high inflation, stocks tend to trade at lower multiples. The 1974-75 period is a good example of this. In Canada, interest rates climbed to 22% and inflation was 11%. Stocks crashed accordingly. In the current environment, inflation is falling but could spike again, especially considering the U.S. economy. Short sellers are hedging their bets that earnings in this kind of environment will be lower compared to times of low inflation. It is a shrewd thing to short certain stocks but if corporations and individuals get hurt and have their net worth eroded, it is kind of a malicious thing to do if on purpose.