Editor’s Note: Tom Stalnaker is an Oliver Wyman partner and the firm’s global aviation sector lead. Khalid Usman is a partner in Oliver Wyman’s transportation and services practice specializing in airline economics. Andrew Buchanan is a vice president in Oliver Wyman’s transportation and services practice. The opinions expressed in this commentary are their own.
After two years of enduring masks, social distancing and quarantines, there’s not much that can come between consumers and their summer vacations this year. Outbreaks of Covid-19 no longer seem to stop them from traveling — and based on recent demand for air travel, neither do higher prices for getaways.
But while consumers may have gotten over fears of Covid, the economy is still riddled with its impacts — including high fuel prices, disrupted supply chains, and a labor market filled with workers hoping to work at least part of the time from home. For airlines, busy summer travel is turning into a season of operational and workforce headaches.
While fares are markedly higher than they were in the winter, so too is one of airlines’ biggest costs: fuel. Jet fuel prices are up 89% since the beginning of the year through June 6, based on US Energy Information Administration data.
When fuel costs rise that quickly, high fares do not always translate into profits. Despite the clamor to travel, profit margins for airlines are still lower than they were in 2019. The average 2022 operating margin for North American carriers is now expected to be 1.9% versus 9.6% pre-Covid, based on new data from the International Air Transport Association. That’s down from a projection made in October of 4.8%, a decline reflecting rising fuel prices, cutbacks in capacity, and disrupted schedules because of labor shortages. Profits for North American carriers are expected to be $8.8 billion in 2022 versus $17.4 billion in 2019.
Those economics aren’t great, and they are aggravated by the challenge carriers currently face maintaining their workforces and the jump in cancellations and delays those shortfalls are causing.
Whether it’s pilots, flight crews, ground workers or mechanics, airlines are coming up short, even with aggressive hiring. By April, US carriers employed almost 5,000 more workers than in March and 16,000 more than they had on their April payroll in 2019. Yet, pilot numbers reflect the squeeze: Based on Oliver Wyman’s latest calculations, there will be a shortfall of more than 8,000 pilots by the end of the year in North America alone. And among maintenance technicians, low numbers of candidates have made it difficult to fill empty spots: Almost three-quarters of senior airline and aerospace executives in North America rank the labor shortage as the No. 1 disruptor facing the industry, according to a 2022 survey by Oliver Wyman. Six out of 10 characterize the search for mechanics and technicians as “extremely or very challenging.”
Airlines would like nothing more than to add flights to busy summer schedules. But accelerating labor shortages have forced them instead to pare back plans for summer to better reflect their ability to staff flights. Between March 16 and June 8, summer schedules — usually packed with more flights than any other time of the year — had been trimmed by 3.1%, based on data from OAG and Oliver Wyman’s PlaneStats.com app. Given the importance of summer revenue to carriers, this is the equivalent of retailers closing some of their stores around Christmas.
Because of these labor shortfalls, any disruption in the schedule — from weather to a delayed fuel delivery to an aircraft taking too long to depart from a gate — threatens dramatic ripple effects. Over Memorial Day weekend, for example, there were more than 2,500 cancellations at US airports, and the month of June has seen thousands as well.
Since the beginning of the year, airline capacity — the measure of seats deployed and the distance they’ve flown — has been steadily slipping. By June, capacity was almost 7% lower than in June 2019, based on OAG and PlaneStats.com data. That was mostly a function of shortages of airline workers, but also staffing difficulties at Transportation Security Administration checkpoints, air traffic control and other vital airport functions, which are also contributing to flight delays. Some of this also reflects increased absenteeism because of workers getting sick with Covid.
Delays and cancellations can push up fuel consumption and costs as aircraft idle on the tarmac waiting for a spot to open up for either takeoff or deplaning. They also saddle airlines with thousands of passengers who still need to get to their destinations — a challenge made exponentially greater with restricted capacity and short staffing.
The labor shortages have been tough on workers as well. Most face substantially heavier workloads at a time when many are new on the job, and still responsible for ensuring that travelers follow Covid protocols. In 2021, the 10 largest carriers saw their ratios of seats per employee increase nearly 80% between February and July. Between April 2021 and this April, the number of seats per employees rose 17%, according to data from US Department of Transportation Form 41 filings and monthly OAG flight schedules via PlaneStats.com.
For airlines, the pressure on margins — at a time when demand has been strong, and people seem willing to pay higher prices — raises questions about what lies ahead for the industry, especially as global economies continue to slow. While higher fuel and labor costs are not expected to abate anytime soon, demand for air travel is likely to fall off as GDP growth declines.
If airlines can maintain higher prices and resist bringing back too much capacity, then operating margins should be able to weather this year’s inflation. But the worker shortages suggest some structural problems that will have to be addressed regardless.