Air Canada, Air France Raise Concerns, Joining Others – Live and Let’s Fly

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?