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As IAG Raises its Forecasts, Have Airlines Found a New Normal?

Following two years of financial turbulence and a summer with unusually high levels of disruption, Q3 reports have brought renewed optimism to the airline industry. As IAG announce operating profits of over 1.2 billion euros, and September demand surpasses expectations, has the sector finally found a post-Covid normal?

The owners of Iberia, Aer Lingus, Vueling, and British Airways have announced revenue of over €7.3 billion in the three months to September 30th. This equates to operational profits of over €1.2 billion in spite of continued closures on key routes to Asia. Comparatively, that is a €1.65 billion euro swing from the €452 million euro losses reported in Q3 of 2021.

American airlines have seen a similar trend. United Airlines reported a $942 million dollar profit last quarter, two years earlier they posted a net loss of $1.8 billion. Sales of American Airlines stock were 13% higher in Q3 when compared to 2019 in spite of a 9.6% cut in fleet capacity. And Southwest reported a record Q3 operating revenue of $6.2 billion.

This change of fortunes is primarily driven by leisure demand, as business travel continues to recover more slowly. Delta Air Lines Chief Executive Ed Bastian believes the industry is experiencing a “countercyclical recovery” as consumers, freed from the restrictions of the pandemic, are prioritising spending on experiences above material items.

In the United States, September typically sees a low demand following the Labour Day rush. Yet, JetBlue reported a 3% growth in September demand and Delta executives noted “you couldn’t buy a ticket to Disney” as Florida demand was so high.

It has taken a long time for airline profitability to return. Air Canada, for instance, has just announced their first quarter of operational profit since the start of the pandemic, and the growth of hybrid working created significant fear that a decline in business travel would permanently damage profits.

For airlines such as Emirates, business and first-class travellers make up approximately 40% of revenue. The continued slump in business travel thus represents a significant threat to the industry. But leisure travellers are supporting the sector through what appears to be an increased willingness to travel during traditionally unpopular periods.

United Airlines chief, Scott Kirby, notes optimistically: “with hybrid work, every weekend could be a holiday weekend,” and speculated “this is not pent-up demand. It’s the new normal.”

Although the industry still faces significant challenges, including understaffing, decreased flight routes, and a decline in first-class demand, airlines are hopeful that a strong Q3 is no anomaly. With the growth of hybrid work schedules, it looks like year-round leisure demand could become the new normal.

Image via Unsplash

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