Warren Buffett doesn’t admit to many mistakes. Asked over the weekend about his decision to dump $4bn in US airline shares last May, the Berkshire Hathaway chief executive responded drily, “I do not consider it a great moment in Berkshire’s history.”
Shares in American, United and Southwest Airlines have all more than doubled in a year, and Delta’s stock price had as well until a recent tumble brought its gain below 100 per cent. Though most US carriers are still burning through cash, they are unabashedly enthusiastic about the future. “The worst is behind us,” Southwest chief executive Gary Kelly said at first-quarter earnings, and American’s chief Doug Parker predicted “the pace of recovery is accelerating”.
Across the Atlantic, Lufthansa CEO Carsten Spohr tried to sound similarly upbeat. “We do look to the future with quite some confidence and optimism,” he said. But he also had to reassure investors that “this unprecedented crisis forces us to overcome our known weaknesses, and it will make us stronger”.
Although they are linked by alliances, the big US and European airlines are facing radically different fates. The Covid-19 pandemic has exacerbated structural differences between the two markets, putting the American carriers in a much stronger position to adjust to a radically altered travel environment.
By 2019, North America was highly profitable. Most of the big carriers had used Chapter 11 bankruptcy to cut costs. Fifteen years of consolidation had left the top five carriers (including Air Canada) with 75 per cent of capacity, allowing them to boost prices.
In Europe, cut-price operator Ryanair had already muscled its way into the top five, a group which controls just 51 per cent of capacity, and other low-cost carriers were nipping at their heels. Lufthansa and IAG, parent of British Airways, are fighting back with their own low-price arms, but those are a work in progress. European flag carriers depend much more on long-haul and business passengers to turn a profit.
Enter the pandemic. Global passenger traffic dropped by two-thirds last year, as measured by revenue-passenger kilometres, which takes into account traveller numbers and the length of flights. Carriers tapped government aid programmes, sold planes and furloughed or let staff go to stay afloat.
Winter lockdowns dashed hopes for a quick recovery. Industry group Iata last month projected that global demand in 2021 would only rebound to 43 per cent of 2019 levels, and the industry as a whole would continue to lose money.
But drill down and a transatlantic split appears. US domestic demand is expected to hit 2019 levels for the second half, while internal European demand will languish below 50 per cent. And US airlines will narrow their collective 2021 loss to 2.7 per cent of revenue, while European airlines will post loss margins of 19 per cent.
Rapid vaccine rollout and pent up desire to see spread out families are prompting Americans to start booking domestic flights, as well as some nearby beach vacations. More than 1.6m people went through American airport screening on Sunday, the most since March 2020. No wonder the US last week saw the launch of its first freestanding new airline since 2007.
The situation is quite different in continental Europe, where vaccines have been slower to arrive and flights last week were down 64 per cent from 2019. Uncertainty around UK travel rules has forced Heathrow airport to plan for anywhere from 13m to 36m passengers this year, down from 81m in 2019. Low-cost carriers are better positioned to move routes around; easyJet is already promising free last-minute changes to help avoid quarantine.
“Historically we compared the US and Chinese domestic markets with short-haul travel within the single European sky. The pandemic has been a sobering reminder that the latter is at heart an international market and much more complex to restart,” says Geoffrey Weston of Bain & Co.
Business travel remains deeply depressed everywhere. Given the rise in video conferencing, some analysts forecast that demand will still be 10 per cent below 2019 levels in 2025. Lufthansa, which used to draw 45 per cent of revenue from corporate travellers, is scaling back high-end offerings and expanding premium economy to attract price-conscious small businesses and splurging leisure travellers.
Having missed the US rebound, Buffett says he “still wouldn’t want to buy the airline business international[ly]”. But the slowdown will not last for ever, even in Europe. Watch for the strongest carriers to expand organically. Why buy a failing competitor when landing slots, planes and crew are already going cheap?