Cowen Senior Research Analyst Helane Becker joins Yahoo Finance Live to discuss airline travel trends, consumer demand, the return of international business travel, and the expectations for airlines in 2023.

Video Transcript

BRAD SMITH: Airlines, they are forecasting continued strong demand even after operations were tested during the quarter accounting for holiday travel. Cowen is naming United Airlines its best idea for 2023.

For more on the steel-bird trade, let’s bring in Cowen senior research analyst Helane Becker. Helane, great to speak with you this morning here. Why United Airlines as the best idea for 2023?

HELANE BECKER: Hi. Thanks for having me.

Well our number-one reason is international business expansion. So we think domestic business travel will not grow that much this year. You’re seeing a lot of layoffs at companies, especially on the West Coast where United has one of its major– one of its major hubs. But you are seeing a return of international business travel where it’s just so hard to do Zoom calls with time-zone changes that range from anywhere from, say, seven hours to Eastern Europe from the US East Coast to as long as 12 hours to Tokyo or 14 or 15 hours to Australia.

So when you think about that, when you think about getting business done and borders reopening, United is very well positioned from their coastal hubs to encompass that travel, and they’re also adding more leisure destinations for the summer to encapture– encapsulate that.

So from our perspective, we think they’re in a really good position to grow that business. That’s higher-margin, higher-yielding business. Air fares in the back of the cabin are going up or have gone up and don’t seem to show any signs of abating. And their costs– even though we expect their labor costs, especially pilot costs, to rise in the second half of this year, their costs seem to be somewhat under control.

JARED BLIKRE: And let me ask you about some of the competitors then. Delta another big airline here that you cover. How does Delta compare to United? And some of the favorable terms that you were seeing in that particular airline, how does that cross over?

HELANE BECKER: Yeah, so sort of similar. The only difference between United and Delta in here is that Delta has some very cost-specific issues for the first quarter. So for them, they have higher maintenance costs than United has this quarter. They have a shift in– or I guess I want to say an increase in capacity from their core hubs like Atlanta and Minneapolis, and that shift is going to cause their unit costs to appear to rise faster than those of United’s or maybe go down slower than those of United’s because they’re both forecasting a decline in unit costs this year from the 2019– I guess the 2019 levels, kind of getting back to those levels.

Anyway, I think those are some of the issues we see for Delta that are very company specific that we don’t see for United. But that said, Delta has a great balance sheet. They’re paying down debt. They’re not buying $20 billion worth of aircraft this year and next year combined, as United is. They have the commitment to pay down debt before they return capital to shareholders. So we do have an outperform rating on Delta too.

BRAD SMITH: Helane, all of the airlines are still trying to get back to their prepandemic capacity, and all of them are pointing to pilots as well. United Airlines making a big investment in one of its new hubs to train pilots and even some of the flight attendants. We know that this has been a big priority over at Delta from our conversations with CEO Ed Bastian as well. Do pilots eliminate all of the capacity issues, though, that airlines have right now, and what is the difference that customers can expect once pilots are fully back in the throes to those prepandemic levels?

HELANE BECKER: OK so that’s a fair question, and there’s a lot to unpack there. Here’s my thought on this. In 2020, the airlines asked any pilot who was intending to retire between 2020 and 2022 to accelerate their retirement, compensated them by paying them until whichever day was that they were going to turn 65. They kept them on for health benefits and so on.

United didn’t do that. They just asked their pilots if they would consider cutting the hours for all pilots rather than accelerate retirements. Probably some pilots did retire, but they tried to keep as many on staff as possible.

Now as you think about coming out of the pandemic, the industry had to hire 10,000 pilots to replace the ones that retired in 2020, those that were accelerating retirement and those who were mandated to retire anyway. And now, you know, fast forward to where we are in 2023. The industry had to hire something like 14,000 pilots last year to replace those who left and those who were turning 65 anyway.

And then as you think about the growth this year, this was going to be a peak decade anyway. We wrote about this as far back as 2014 that the 2020s were going to be a period of time when the airline industry needed to accelerate pilot hiring, and this year we’re forecasting at least 10,000 to 12,000 pilots need to be hired– 8,000 at American, Delta, United and Southwest alone, and then the other 2,000 to 4,000 at every other airline to handle the growth.

This is why many small cities are losing service because airlines are hiring from their regional partners. And just because one airline says we won’t hire from this regional partner because we don’t want to, you know, screw up our own feed, it doesn’t mean another airline won’t hire from them.

So you see a lot of pilot training going on. That’s a big bottleneck. We’re thinking that doesn’t get resolved before next year at the earliest and more likely 2025. Every time I think about how close we are to ’24 and ’25, it’s astonishing to me because it’s going to be a couple of more years.

And then aside from all of that, you don’t have a lot of expansion going on at airports around the country. You have a lack of air-traffic controllers, which people forget about and don’t talk about. The government says ATC is not an issue, but the industry is losing 400 to 500 a year in retirements, and at least 200 to 300 a year wash out of the academy, and they only take 1,000 into the academy. So they’re only netting 500 or so.

So in addition to–


HELANE BECKER: –the pilot shortage– yes, sir?

BRAD SMITH: Yeah, I’ve got to be quick here. We’ve only got about 15 seconds. But if I’m an investor trying to figure out if I should get into any of the airlines right now, should I be excited, or should I be a little concerned about the number of pilots that need to come into the fold here?

HELANE BECKER: I think you should be excited to invest in the largest airlines because they’re never going to have a problem.

BRAD SMITH: All right.

JARED BLIKRE: All right. We’re going to have to leave it there. Really appreciate you stopping by, all your insights, as always. Cowen senior research analyst Helane Becker.

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