• Top questions for the airline industry this year: 1) will the airlines be able to offset cost inflation from (highly unionised) labour and airport maintenance, and 2) what happens when/if the Boeing 737 Max is recertified.
• Southwest, United, and American were the US airlines most impacted by last year’s grounding of the 737 Max. Profits were quickly impacted as airlines are a relatively high-fixed-cost industry (cancellation of flights hurts). But the grounding was a clear positive for those without the 737 Max – like JetBlue and Delta.
• Goldman’s propriety unit revenue index shows hotel occupancy rates and oil offer real time information on revenue trends.
• Industry consolidation is the biggest driver of profitability improvement – the top 4 players in the US now have > 80% market share. Potentially, there’s room for more consolidation at lower cost airlines.
• Improved profitability/cash flow in the past decade means airlines can reinvest: more product options, better consumer satisfaction.
• Industry is different this time, albeit still cyclical, especially business travel. The variable cost share has increased (more leasing, partnering) product differentiation. Most of the industry has used expansion to deleverage balance sheets.
• Also looks at trends for the next 5-10 years, including use of data from an operational standpoint to avoid cancellations and improve maintenance schedules.
Why does this matter? The podcast offers a different view on US airlines from the typically negative ones around disrupted supply chains and the sizeable overall hit to US growth from halting production of the 737 Max. (Bullish US airline stocks)
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