Slight optimism about increased capacity

U.S. and international airlines are gradually rebuilding their networks as travel demand perks up, but the latest financial results demonstrate the road to recovery from the pandemic will be long and difficult.

Carriers this week showed increasing optimism that passenger business is coming out of a three-month slumber by resuming more service in the summer compared to May, led by American Airlines (NASDAQ: AAL) announcing plans to operate its domestic schedule in July at 55% of its prior-year level and Lufthansa boosting capacity from 3% to 40% by September.

The crucial importance of passenger flights

The financial health of passenger airlines is important to freight shippers because a robust supply of passenger flights offers more options for moving cargo and helps keep freight rates down.

“We’re seeing a slow but steady rise in domestic demand. After a careful review of data, we’ve built a July schedule to match,” said Vasu Raja, American’s senior vice president of network strategy, in a news release. “Our July schedule includes the smallest year-over-year capacity reduction since March.”

The International Air Transport Association (IATA) said global passenger demand hit bottom in April, plummeting 94% compared to 2019 as governments closed borders, restricted travel and imposed quarantine restrictions on international travelers. The industry is staring at a $315 billion revenue shortfall this year, but there are signs the economic freeze is thawing.

Number of flights increases 30%

The U.S. added 2.5 million jobs in May and the unemployment rate fell to 13.3%, according to a strong jobs report Friday from the Labor Department that suggested the economy is rebounding faster than many economists expected.

The number of flights increased 30% between the low point on April 21 and May 27, although most of the extra activity involved domestic routes and was off an extremely low base, IATA said. In late May, flight levels in South Korea, China and Vietnam were just 22% to 28% lower than a year earlier. Searches for air travel on Google also increased 25% by the end of May compared to mid-April.

American Airlines back to over half of normal capacity

In response to more leisure travel business, American Airlines said it plans to fly more than 55% of its domestic capacity in July compared to 2019, and reopen several of its Admiral Club lounges. International travel demand has been slower to bounce back, so the airline will only operate at near 20% capacity. Systemwide capacity will amount to 40% of 2019 capacity versus 20% in May.

American said that by the last week of May it carried a daily average of about 110,000 passengers per day — up 71% from the 32,000 average daily passengers in April — with load factors reaching 55%. It is increasing flight frequency from hubs such as Dallas-Fort Worth and Charlotte, North Carolina, to destinations customers are searching and booking most, primarily Florida, the Gulf Coast and mountain areas. More seats will be offered as Florida theme parks lift distancing restrictions.

Experts warn about lower yields

J.P. Morgan airline analyst Jamie Baker cautioned investors not to get too excited about American’s upcoming earnings. Even assuming American operates at 60% of capacity with 65% of seats filled, it faces a 60% decline in domestic revenue because yields will be lower, And with international business operating at only 20% of capacity and fuel prices starting to rise, systemwide revenue will likely be down about 70%, he estimated.

Delta Air Lines (NYSE: DAL) plans to fly twice as many domestic flights in July as it did in May, CEO Ed Bastian said during an industry event that was webcast Wednesday, The Wall Street Journal reported. Delta is now carrying some 65,000 passengers a day, more than twice the number in April.

United Airlines (NASDAQ: UAL) said Thursday it will restore 140 nonstop routes in North America. Domestic capacity in July will be down 70% year over year, but that’s better than the 87% capacity reduction in June.

Alaska Airlines (NYSE: ALK) is flying at about 25% to 30% of normal capacity in June compared to 21% in May and its average load factor increased to 40% last month versus 15% the prior month. In a regulatory filing, the carrier said it’s burning $200 million in cash during June, up from $170 million in May, but that it expects to be at zero cash burn by the end of the year.

Meanwhile, Southwest Airlines raised $1.8 billion in securities this week and will use the money to pay off short-term loans taken earlier this year.