This ‘unappreciated asset’ is positioning Delta for success

Travel demand is projected to hit a record high this summer based on earnings forecasts. However, the ongoing issues facing Boeing (BA) are preventing airlines from accessing new planes, stunting growth amid high demand. Peter McNally, Third Bridge Global's head of industrials, materials, and energy sector, and George Ferguson, Bloomberg Intelligence senior aerospace defense and airlines industry analyst, join Market Domination to discuss the state of the airline industry as the summer travel season heats up.

"Capacity is growing; it's just not growing as fast as the airlines hope. And you've got companies like United (UAL) who've got very ambitious targets out to 2026 that they've had to temper that a bit... It doesn't seem like Boeing's problems are going to be sorted anytime soon, and it's not like Airbus (AIR.PA) can go any faster than they already are," McNally explains. Ferguson states that the record travel is due to airlines putting up record schedules, adding, "Thank God they can't get all those airplanes because they crushed margins even more."

McNally points to labor costs making airlines less profitable than they were pre-pandemic and believes that Delta Air Lines (DAL) is among those handling the issue best: "The unappreciated asset that Delta has is their tech ops business that allows them to do their own maintenance, repair, and overhaul." Ferguson adds that retirements in the industry will peak in 2026 and 2027, which could cause a pilot shortage.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written and updated by Melanie Riehl

Video transcript

Well, sticking with travel, Josh airlines have a potential problem.

Travel demand is projected to hit a record high this summer based on earnings forecast.

But the issue, ongoing problems at Boeing are hindering airlines access to new planes and limiting potential for growth.

Potentially, we're looking at how to navigate the big picture with the Yahoo finance playbook.

Joining us now, Peter mcnally third bridge, global sector for industrial materials and energy alongside George Ferguson Bloomberg Intelligence, senior analyst covering the aerospace defense and airline industries.

Guys, it is great to see you.

Thanks for being here.

I think you guys have a little bit different views from each other on the capacity constraints that are out there.

Peter, I want to start with you and, and how you see it for the industry there.

What's the demand supply match up looking like right now?

Well, demands been healthy.

It's been growing for four years now.

Um The problem is, you know, airlines do want these new planes, they can't get them, they're keeping the ones that they do have in the air longer for sure, but there's still some maintenance constraints too that need to go on particularly around, around engines.

So it is, you know, capacity is growing.

It's just not growing as fast as the airlines hope.

And you've got, you know, companies like United who've got very ambitious targets out to 2026 that they've had to temper that a bit.

So, you know, we'll see, it doesn't seem like Boeing's, uh, problems are gonna be sorted anytime soon and it's not like Airbus can go any faster than, than they already are.

A and George le le let's um get you in as well.

Maybe we'll start there with that same big picture question.

George demand supply dynamics.

How are you thinking about it?

Yeah.

So we put a report out this week on, on this question because it's been overhanging the market here for, I think, you know, for months now, uh there's definitely a lot of concern that there's not enough lift.

We basically analyze profitability for all the major airlines globally and we looked at their ebita margins which would be margins or, you know, you pay for any changes in your capital structure because debt, maybe you took on during the pandemic or whatever.

So we looked at ebita margins compared to last year compared to 2019 and 2016, 2 of the best years in the last decade and most airlines aren't achieving those margins.

So I'd say there's record travel and that's because the airlines are putting, putting record schedules up into the air, but probably thank God they can't get all those airplanes because they crossed margins even more.

When will they slow down?

I think when they start having uh losses and they're, they're not there yet, but we, when we look at profitability and return on invested capital measures, they are just not performing like they did last decade.

There's too much capacity.

That's so interesting.

And I mean, the airlines have always sort of struggled with this capacity, how to get that balance, right.

Peter, are there any airlines that are, are navigating this better than some of the others?

Either because of the circumstances, they're not as exposed to say Boeing or because execution wise, they're doing a better job.

Well, I think the, the one of the big problems that we're not talking about that make airlines less profitable than they were pre panem is labor costs.

You know, you've negotiated with the union, you step up 30 to 40% which has been the rate we've seen and then you stay there, you know, so this has been a dragon, whether it's pilots, mechanics, uh flight attendants, they're all getting, getting more money.

But uh you know, Delta Airlines has been the one that has found a way to navigate this uh better, better than others, um extremely loyal business, uh travelers, a very good fleet, clean balance sheet.

Um No real need for like major investments.

The way, let's say American had to do a, a big refresh on their fleet prepa uh borrowed a lot of money to do things like that or United as we talked about a bit earlier with this aggressive uh growth strategy that they have.

But I think kind of the unhidden or the, you know, the unappreciated asset that Delta has is their tech ops business that allows them to do their own maintenance, repair and overhaul, which, you know, we started seeing engine problems last summer.

Um that has grounded a lot of Airbus planes, you know, they had uh jetblue and a and a few others a bit more.

But uh Delta seems to be the one that has navigated best.

You, you, you agree with that George, would you, would you say um Delta if you were to look across, you know, the industry seems to be navigating this mo most effectively?

Definitely, I, I we totally agree there.

So I think if you look at the US market, it's Delta and United that are performing better than all the the other airlines.

I think that's a function of premium, both premium leisure travel and business travel, demand.

Uh and long haul, I think long haul is generally performing better than short haul now.

Right?

So if you're going inside a continent, I think things are very competitive because there's a lot of low cost carriers that will compete uh you know, with you, even if you're a full service carrier uh to carry those passengers.

So fares are under pressure.

But I, I think still this summer you'll see good fares into Europe, pretty good fares, uh, into Asia Pacific.

And that helps Delta and United the most in the US?

George.

Do you think that the whole labor issue here and both the difficulty of flying, finding staff and also the higher wages to pay them?

Do you think that that is a problem that's just here to stay?

So, I do.

And so we've written a report on this as well.

It's under the Bloomberg, uh, service.

Uh, so when we looked at, uh, retirements that were coming, um, we use airline pilot central.com, which I think is fairly reputable.

But I, I will admit, you know, we, we could sort of dive in and get the, the numbers exactly ourselves.

But when we looked at their numbers on retirements, we think retirements are gonna peak 2026 2027.

I think it, I think it's sort of similar to the dynamics in the rest of the economy where a lot of people, boomers came in a lot of these businesses and they're retiring now in, in larger numbers.

Pilots are really hard to replace because they're highly trained, takes years and years to get trained up to get into a cockpit.

Uh, and they're the ones getting sort of the 20% increases at the last, uh, pay negotiation.

I suspect they may get that similar number actually.

Maybe not as high.

As 20 but they may get pretty high numbers mid decade when they uh when they do this again.

So yeah, that, that's a big problem right now with airlines 11 other question, I have Peter.

Um and I realize this sounds like a smaller question, but just from a consumer point of view, I'm interested to get your take.

You see this trend of airlines raising bag fees?

Is that, is that a smart way to raise more revenue or do you risk alienating your customer?

How do you think about it?

Well, you know, look once, once, you know, one airline does it and it follows another and then, and then another, it's just gonna be the way it is.

Like we eliminated change fees, you know, during the pandemic at some point that's going to come back to it is a, it is a valuable source of revenue, um, that the airlines, you know, will, you know, will pull on at some point.

You know, it's part of the prescription.

I see that Elliott as you know, the activist for Southwest is to, you know, introduce more bag fees.

But, uh, these companies are, you know, are trying to grow profits and that's one more way to do it.

I mean, George, I it's not just the bag fees, right?

I mean, at this point, I feel like I'm paying up to not sit on a cardboard box on the plane, you know, it, it's got like there, it's, everything is, is in these tiers and I sort of agree with Josh here at what point do you risk alienation?

Although I guess your choice is just not to fly at all.

Yeah, I think that's about right.

I think everywhere you go now the revenue managers are looking for different ways to slice and dice the airplane cabin and figure out what they can get people to pay for it.

Right.

And so the challenge is to find more things to sell out.

And in the old days those are things you and I just got, I guess, got for free, got by luck when we got, you know, an, an exit ale or something like that.

Uh And so that's the new formula for increasing revenue.

Delta does it?

I think better than uh most others.

I think it may be here to stay and hard to avoid Peter George.

Gonna leave it, leave it there.

Thanks guys for joining the show today.

Appreciate it.

Thank you.