Key points:
- Tui's had to cancel 25% of flights out of Machester
- There are significant supply problems in the airline industry
- How is this likely to affect the others, EZJ, IAG and Wizz?
Tui's (LON: TUI) share price is down 2% in London this morning off the back of those reports of having to cancel swathes of flights out of Manchester. Far from this being just another regional airport for Tui this is actually one of their major UK operations bases. Cutting 25% of flights, as Tui is doing, is going to hurt.
The big question for us is how is this going to affect – or how informative is it about the effect – on the other major airlines we might be interested in? Easyjet (LON: EZJ) has had problems as we know. We can imagine that IAG (LON: IAG) the owner of British Airways will have similar problems. And it's possible that the damage will extend out to Wizz Air (LON: WIZZ) as well.
The basic economics of airlines needs to be considered. The overhead, or fixed costs, are high, very high. The cost of getting a flight into the air doesn't vary – not very much at least – by how many passengers there are on it. So, profits depend upon being able to match supply to demand – gaining high passenger loads that is. Fly a ‘plane with 50% of seats unsold and that's a loss, fly with no unsold seats and that's a lovely gross profit.
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There are obviously two sides to this. One is what is demand going to be? During lockdown it was around and about zero so no one flew. Fair enough – but that then leads to how many will fly now we all can do so again? Various airlines around the world (including Delta in the US for example) have been reporting considerable pent up demand. Rather than losing out habit of flying away it appears we're gagging to be able to do so now that we can again. That would indicate high load factors. And we've seen predictions from airlines that ticket prices are going to be high this summer for exactly that reason.
The other side of this is supply of course. Because it's the load factor that matters – the percentage of seats sold – the airlines have to get their own internal predictions of what demand will be right. This is where we might be having problems. Tui is cancelling 25% of its flights out of that major Manchester base of theirs. Easyjet has been cancelling flights over this just passed half term. But they're not cancelling because they overestimated demand – they miscalculated their ability to supply.
It appears that they laid off too many people during the lockdowns, people who have gone on to other jobs and careers. They're finding it difficult to attract the necessary staff back. It's at this point that the arguments start. The airlines are claiming that it's government regulations that make it difficult. It's necessary to gain a 5 year employment history, with checked references, to gain the security passes to be able to work on airlines. This is something difficult to do at speed of course. So, the airlines are asking for this bureaucracy to be lifted for this season. That may or may not happen.
The airlines' problem seems to be that demand is roaring back, which should be good for airline stock prices. But the ability to increase capacity is restricted. So, there's money being left on the table, which isn't so good. And selling tickets on flights that then have to be cancelled, that's not good at all, that can be a significant cost in fact.
Airline shares have been rising on that apparent increase in demand. The difficulties over supply might mean that's been premature.
