Airlines Were Soaring Toward Recovery. Then Omicron Arrived.

U.S. airlines were optimistic about a recovery in 2021. Following one of the worst years in aviation history, where the pandemic devastated airports and airline finances, the early rollout of COVID-19 vaccines fueled optimistic forecasts for a “boom” in air travel and a return to profits.

However, the emergence of the Delta variant and the rapidly spreading Omicron variant have led to tighter international entry regulations, with several countries facing another surge of COVID infections. What do these new challenges mean for airlines, and are there any silver linings for 2022?

The answer to the latter question is a cautious “yes,” according to a series of financial reports from major airlines in recent days. “The fourth-quarter results are exceeding airlines’ expectations,” notes Henry Harteveldt, travel industry analyst and co-founder of Atmosphere Research. Travel volume is increasing, particularly for holiday trips in North America (despite Omicron), flights are filling up, and airlines are successfully “upselling” customers for more legroom or additional baggage allowances, he adds.

Delta Air Lines announced on Thursday that it now anticipates an adjusted profit of around $200 million for the final quarter of this year, following an earlier forecast of a “modest” loss during this period due to rising fuel costs—typically the largest expense for airlines after labor. However, fuel prices have since stabilized, and at the same time, demand for airline tickets has surged. The airline previously reported a $1.2 billion profit for the third quarter.

Other major U.S. airlines, such as American Airlines and United Airlines, also reported profits in the third quarter of 2021, although some of this success was supported by ongoing federal pandemic assistance. As airlines head into 2022, they will no longer have Uncle Sam's help, as the pandemic program has concluded.

The recovery, such as it is, relies mainly on strong domestic traffic and travel to nearby destinations in Canada, Mexico, and the Caribbean. “Long-haul international travel remains the primary uncertainty,” says Harteveldt, particularly with the rapidly changing rules for U.S. travelers to many popular European destinations.

For this reason, the largely domestic airline Southwest Airlines stands out as a clear winner as we approach next year. It has consistently been profitable—a rare occurrence in the industry—boasting 47 consecutive years of profitability through 2019. It now anticipates being profitable again in the fourth quarter of 2021.

However, the outlook isn’t entirely bright: Southwest indicated in an investor presentation that it expects 2022 to be “a bumpy transition year,” with capacity likely to remain flat, at most around 2 percent higher than last year, and fluctuating fuel prices adding another variable.

Still, as outgoing Southwest CEO Gary Kelly mentioned to Dinogo at a recent Wings Club event in New York City, “We’re very optimistic about the upcoming year,” to the extent that the airline plans to take delivery of over 100 new aircraft in 2022 (partly to replace older, less efficient models). The airline has managed to keep costs down by exclusively operating Boeing 737 planes and offering minimal frills, single-class service, and rapid airport turnarounds.

“They are the ultimate low-cost carriers,” remarks Michael Derchin, a veteran Wall Street airline analyst and author of the “Heard in the Hangar” newsletter. He points out that the airline’s unconventional policies—such as no fees for checked luggage or ticket changes (Southwest eliminated change fees long before they became a trend during the pandemic)—have garnered it a devoted customer base. This year, the airline also added 18 new airports and expanded its flight network to include Hawai‘i.

The biggest question mark for the industry as a whole revolves around what will transpire in what has typically been the largest sources of airline profits—business travel and premium-class traffic on long-haul flights.

“The primary effect will be felt in long-haul travel to Europe,” predicts Harteveldt. Demand for transatlantic travel “has plummeted significantly due to the increasing restrictions related to the rapid spread of Omicron, among other factors,” leading to a decline in advance bookings for the first half of next year.

The forecast for 2022—there are still some bumpy skies ahead

Airline industry associations are also sounding a note of caution regarding their predictions for the upcoming year. During a webinar this week, International Air Transport Association (IATA) chief Willie Walsh mentioned that the wave of new travel restrictions in response to Omicron will likely dampen demand for international flights in the coming months, although it’s too soon to assess the full extent of the impact. A recent report from domestic airline association Airlines for America indicated that international travel from the United States was still 41 percent lower than in November 2019.

The association highlighted that airline fleet capacity is currently about 7 percent lower than pre-pandemic levels, noting that a return to 2019 capacity largely hinges on the revival of business travel, which remains uncertain.

At the same time, U.S. airlines are facing challenges similar to those affecting many employers across the country. Staffing shortages have impacted airport operations, from baggage handling to customer service roles. Southwest’s CEO, Kelly, mentioned that this labor shortage, compounded by the ongoing pandemic, poses the greatest obstacle to the airlines’ goals of regaining pre-COVID capacity next year.

On a brighter note for travelers, the Airlines for America report indicated that “average airfares are still lower than before the pandemic,” with prices in the second quarter of this year down 36 percent compared to the same timeframe two years ago.

Moreover, Harteveldt pointed out a surprising upside for airlines amid the recent surge in COVID cases: “Due to Omicron, we are witnessing a rise in vaccination rates.” This factor, more than any other, will be crucial for a sustained recovery in airline travel.