Helane Becker, Cowen senior research analyst, joins Yahoo Finance to discuss the recovery prospects for airlines.

Video Transcript

BRIAN SOZZI: The airline sector is starting to take off as travelers book their post-vaccination spring and summer vacation. Already this week, we have upgraded first quarter forecasts from JetBlue and Southwest. Delta CEO Ed Bastian said Monday he is seeing, quote, "glimmers of hope in the industry."

Helane Becker is a Senior Research Analyst at Cowen and has coverage of the airlines. Helane, always good to speak with you here. So the commentary has been very bullish from the major airline makers. Should investors expect a V-shaped recovery in the bottom lines of these companies?

HELANE BECKER: No. No, not really. We're thinking more like a, I don't know, maybe a W or something like that. I'm not sure which letter to use. But-- but we definitely think that things are starting to improve. We thought that around now, so mid-to-late March, we would see between 1 million and 1,200,000 passengers per day travel pretty regularly through the end of May.

And then Memorial Day weekend we thought is when we would see the real jail break for the summer. And it's not going to be international travel, except if it's Mexico or the Caribbean near-- what I would call near US. I think it's going to be US domestic is going to carry the day for the summer months, because Europe is still not open. Europe will probably recover ahead of Asia.

But we're still looking at, you know, that recovery being later this year into next year, primarily because borders are still closed, and it's not that easy to get back into the United States even, right. You have to-- to come back into the US, you have to take a COVID test, and I'm not even sure-- actually, I should know this-- if you have to be vaccinated, like a negative COVID test or having been vaccinated. I think as we get closer to Memorial Day, that'll become clearer.

And as more European citizens get vaccinated as well, I think things will start to open. I think Europe is going to probably try to salvage the second half of the summer. But the longer it takes to-- to get everybody vaccinated and back on track, the longer the recovery will take. So I'm not forecasting a V. We're kind of forecasting, you know, bouncing along a bottom that's going to be, you know, I don't mean to be punny, but up and down.

MYLES UDLAND: You know, Helane, when we spoke maybe, I don't know, six, nine months ago, it was-- like, it was existential for the airline business. Have they gotten through that period of at least being, like, we can probably exist for the next couple of years? Or are there still major financial challenges ahead? I mean, the market is cheering companies who are saying our cash burn is down to $13 million a day from $14 million a day. Are we-- look, are we actually through the woods here on some of these names?

HELANE BECKER: I think we are through the worst of it at this point. You know, I'm not going to say the old analyst comps get easier, but they do, obviously. I think as more vaccine gets into people's arms, people feel more comfortable traveling. We're-- we're definitely seeing that. And I really think that's what's going on here.

I think in terms of getting through the worst of it, the government was very generous with the industry. In order to have a successful US economy, we really need a successful US airline industry. And the only way you do that is by having liquidity to get through the worst of it.

And it's a cash flow business, right, because the airlines generate most of their money within 90 days of a person traveling. Pre-pandemic, 60% of all tickets were booked within 90 days of traveling and about 20%, 25% within 30 days of traveling. So it's not like the airlines build up these enormous cash positions.

What we're seeing now, though, is that bookings are coming in a little further out. People are looking for the rest of March, April, May, June, July, August. And those looks are turning into bookings, and that will obviously help cash flow, for sure. It doesn't necessarily help revenue yet, but it definitely helps cash flow. And that obviously helps the cash burn rate. So there are-- so there is that.

I would say the negative is on fuel. Fuel costs have backed up a little bit, so the airlines have been trying to make sure they recover some of that cost. And certainly, we're seeing very strong fares in markets where people want to go. So it seems like Mexico, the Caribbean, Florida, we're definitely seeing fairly strong airfare. So that's a good thing.

The industry is about 15% to 20% smaller than it was pre-pandemic. And I don't see airlines rushing to pull-- put equipment back in to the market in the short term, at least not for the summer months. Everybody is treading lightly to make sure that what we've started to see the last week or so continues through-- as I said, through the summer.

BRIAN SOZZI: Helane, are you surprised that we have not seen airline mergers?

HELANE BECKER: I don't know. That's a good question. I don't think I'm surprised that we haven't seen mergers among the big companies, because I don't think they could get done anyway. But among smaller airlines, maybe I'm surprised that we haven't seen consolidation at that level. For sure, I would have thought that this is the time when you would see that.

What we are seeing, though, on the other side of the coin is new startups. We have Breeze Airways, which recently received regulatory approval to start flying. We have Avelo Airlines that is starting up. And we have Global Crossing, which is an airline based in Miami that's going to do ACMI passenger service, which is a form of charter, among others. So I think that's what we're seeing rather than the mergers that we would see-- that we would expect to see.

MYLES UDLAND: Helane, what about business travel? I mean, I think that-- like, that doesn't seem to be even a part of the conversation right now, and it's such a big part of, you know, certain of these airlines' business. I mean, does it ever come back, I guess? And how are you thinking about, you know, that risk today?

HELANE BECKER: Yes. So I think in a word the answer is yes, it comes back. It's a question of when it comes back. So in the short term, I think people are really concerned about getting their own employees back to the office, let alone trying to figure out how we now accept visitors. So until both of those things occur, you're not going to see significant business travel growth. That's part of it.

The other part of it is conferences, right. I think right now, people are looking at conferences as super spreader events. And I think people are concerned about bringing too many people together in a conference. And yet they have to come back, too, for networking purposes, if only for networking purposes, especially for younger employees where they just don't have a network built up. They're new to the industry or new to the business, and they really help. So I think those are two things to consider.

I think small and medium-sized companies have never really stopped traveling because without the travel, they're not generating revenues. I think the large corporations are the ones who really aren't traveling that much. So our-- our view is that business traffic starts to come back among the corporates probably in the fourth quarter after people get back to work. And we're kind of thinking people get back to work sometime between May and September, October. And then we see that business traffic start to come back in the fourth quarter, as I said, and then go through 2022.

Now that said, I don't think we're getting 100% of it back. I think there's a fair amount of business traffic that can be done where you can shift to Zoom calls or-- or Skype or whatever, you know, GoToWebinar or whatever the other ones are. But those technologies don't always work and can be somewhat frustrating. And I think that you also build relationships when you take someone out to lunch or you take someone out to dinner and you get to know something about them beyond their title.

And I think that that comes back. So maybe in the next 15 months, let's say 18 months, we get 80% of the way back. And then beginning in 2023, we start to get that last 20% back. But I think that's the hardest part that will come back, those one-hour meetings that you could just as easily do over-- do over, you know, some use of technology.

BRIAN SOZZI: Yeah, Helane, I'm-- I'm looking forward to Myles buying me a 50-ounce tomahawk steak. But nonetheless, while I have you, I saw you recently had a fireside chat with United's CEO Scott Kirby. Anything he say to you peak your interest?

HELANE BECKER: Well, we talked-- the purpose of the talk initially was to talk about their investment in Archer Aviation and what they're doing from a sustainability perspective. And I think that's going to be so important in this decade. I think from-- you know, when airlines buy aircraft, they're making a 25-- 20, 25-year decision. So any aircraft that gets delivered now is going to fly into 2040, right. And so-- and all the airlines have pledged to get to either some level of 50% to zero net emissions by 2050, so we have to be mindful of that.

And the talk with-- with Scott was really designed to find out, you know, how are you thinking about this? What about sustainable aviation fuel? And the message is every airline with USAF, if it could be found in scale, it just can't be found in scale, and it cannot be found in-- at a cost competitive level, A.

And then B, as far as the investment in Archer, that's an eVTOL company, so vertical takeoff and landing, it's a quiet-- think of helicopter, but it's a quiet helicopter, their intention is to use it to replace somebody going from Midtown Manhattan, let's say, to Newark Airport. It's a-- I think he said it was something like a 10-minute flight versus it could be an hour car ride. So that-- that's going to be the short haul.

The way I'm thinking about it is the disruption is in short-haul aviation gets disrupted first. And then over time, the batteries get developed, sort of the way it developed with-- with automobiles. And you know, initially, the batteries could only go around town, and then they could go a little longer on the highway. And then eventually, they'll be able to go even further. So we talked a lot about that.

And then we also talked about the fact that they thought they were seeing-- their goal is for 2023 is getting back to their 2019 margins, which should be done-- should be able to do, depending on fuel costs. But x fuel, let's just talk about it that way, they've taken a lot of cost out of the business. And I think that's the way to think about the aviation industry.

If you get back to $45 billion in annual revenue as Delta, American, and United had, the cost that they've managed to take out of the system won't come rushing back in 2023, and so you should see significant margin improvement. My short-term concern is that the stock price improvement that we've seen over the last, I don't know, let's just say year to date, where these stocks have performed amazingly well, anticipate 2023 numbers. And the only way you can justify the current stock prices is to think they do the 2023 numbers in 2022. And then the stock prices makes sense, because you still have to improve the balance sheets.

Everybody took on a whole lot of debt. But that said, everybody has a whole lot of cash and liquidity. So if things improve speedier than we think, and we think that they'll be able to use some of that excess-- that will leave excess cash, and they'll be able to use some of that excess cash to pay down that debt that they took on and improve their balance sheets. So it's kind of both of those things. So long answer to the question. Sorry about that.

BRIAN SOZZI: We appreciate it. You-- you always have the pulse of the airline industry. Helane Becker, Senior Research Analyst at Cowen, always good to see you. We'll talk to you soon.

HELANE BECKER: Thanks. Thanks for having me.