Skift Take

For most U.S. airlines, June was the best revenue month in a very long time. But don’t mistake that for a sustained recovery. The situation is dicey. It’s not clear whether this recovery can continue for the final three months of the year.

Skift

While demand is strong and yields remain above pre-pandemic levels, the fare environment has cooled since June, the strongest month so far in the post-Covid recovery, Southwest Airlines executives said Thursday on the airline’s second quarter earnings call.

“We’re seeing through all of our external data as well as our internal data that yields peaked in June,” Southwest Chief Commercial Officer Andrew Watterson told analysts. “Essentially you couldn’t push leisure travelers beyond a certain fare level, it seemed like.”

U.S. travelers may have had a price ceiling, but they still shelled out a lot of money for plane tickets between April and June, Southwest’s results show. Southwest’s revenue per available seat mile, which measures how much money an airline makes for each seat it flies one mile, increased 22 percent compared to 2019. By the same metric, costs rose 20.7 percent, much of it from higher fuel costs.

Still, Southwest could sure use a stronger return of business travel than it has seen so far, but the prospects for the fall, when business travel tends to jump, are too uncertain to predict with clarity.

Overall, Southwest recorded a strong quarter. The airline had record revenue, reporting $6.7 billion in sales, 13.9 percent more than in June 2019. Its net income was $760 million, about 2.6 percent higher than the same period three years ago. And while costs rose significantly, Southwest was buoyed by fuel hedging contracts, which saved it $332 million on fuel and oil expenses, or about 68 cents per gallon.

Leisure Leading Recovery

As at most airlines, leisure travelers have led Southwest’s recovery, with business travelers still not back to their pre-pandemic travel patterns.

The airline told analysts its “managed business revenues” decreased 31 percent in April, 23 percent in May, and 19 percent in June, all compared to the same month in 2019. Fares have been above 2019 levels for business travel, but not enough to offset the smaller volumes.

While executives noted business travel is on an upward swing, they said they aren’t sure how the trend will evolve, given a softening economy and lingering concerns about Covid among some travelers. Typical, U.S. business travel picks up in September, but no one is sure what will happen this year.

“We’re rotating out of a high leisure period into a high business period, and so you expect business to hold up more of your capacity, ” Watterson said. “And so that’ll be the big question.”

There’s also some question about which types of business travelers will return. Thus far, Southwest has seen education, government and small business travelers booking in strong numbers. But fewer business travelers in technology, banking and consulting have come back.

“These large companies don’t have the same number of people out there traveling right now,” Watterson said. “It varies by company what the reason is, but the hoped-for benefit as we get into the travel season here, post-summer, is getting more travelers per account out on the road.”

Network Recovery

As business travelers return, they will find more of the short-haul flights that made Southwest famous. The airline typically blankets key markets, like Dallas/Houston, or San Francisco-Los Angeles, with hourly, or near-hourly, flights designed for a business traveler’s schedule.

During the worst of the pandemic, Southwest cut many frequencies, instead using airplanes to add flights to new leisure-focused destinations, such as Steamboat Springs, Colorado, and Bozeman, Montana.

Recently, many of the business-centric flights have returned, though not necessarily because the airline wanted to service business travelers. Instead, executives said, they resumed frequencies to increase operational reliability.

When operations turn poor, an airline may have trouble canceling a once-daily flight to a vacation destination, because it can’t put the customers on other flights. But it can cull a single flight from Dallas to Houston without hurting operational integrity, because it it can rebook passengers an hour later.

“We’ve added short-haul flights in business-oriented markets as they provide us more options when we have weather or ATC delays,” President and Chief Operating Officer Mike Van de Ven told analysts. As part of the same strategy to add slack, Southwest added more flying between its crew bases.

While the new routes have improved reliability, Watterson said they have been a drag on unit revenue, because the airline has struggled to fill those extra seats at strong fares. But if business travel bounces back further this fall, he said, Southwest will be ready.

“It just shows you there’s insufficient business demand for that level of short haul at this point in time,” Watterson said. “But as we go into a more heavy business travel season that can be mitigated through the return of business travel.”

If business travelers don’t come back, Southwest can use the short-haul flights to feed leisure passengers onto connecting flights, Watterson said. Southwest typically calls itself a point-to-point airline, but a significant portion of its customers make connections.

Skift Take

Hilton has more properties signed for development than at any time in its history. But getting the these hotels open, given supply-chain, inflation, and labor-market challenges, may be tricky.

Sean O’Neill

For Hilton Worldwide, one of the key long-term engines of growth would be returning to its pre-pandemic level of net unit growth — or essentially the pace at which it adds properties to its network. The timetable for that recovery was still unclear on Wednesday when the hotel giant reported its second quarter 2022 results.

Room growth was an important driver of the company’s profitability, along with higher daily average rates. In the quarter, it generated a quarterly profit of $368 million attributable to stockholders off of $2.24 billion in revenue. The company reported that its systemwide revenue per available room, a key industry metric, was only 2.1 percent below the 2019 level on a currency-neutral basis.

Hilton said on Wednesday that it’s on track to grow net units by about 5 percent this year. But that was below the 6 to 7 percent range the McLean, Virginia-based company had enjoyed before the pandemic. Yet the company was optimistic about its hotel development pipeline.

“One in five of all hotel rooms worldwide under construction is tied to a Hilton brand,” said Christopher Nassetta, president and CEO, during a call with investors. “Our development market share is more than three times larger than our existing share, meaningfully higher than our peers, given our industry leading RevPAR [revenue per available room].”

In the quarter, Hilton opened 91 hotels worldwide and achieved net unit growth of 13,300 rooms. In the comparable quarter in 2019, the company opened 123 hotels totaling 17,100 rooms.

Record Hotel Development

The company has boosted the signing of hotel development deals.

But a backlog appears to be growing. As of June 30, Hilton’s development pipeline was nearly 2,780 hotels representing more than 413,000 rooms, a record. Half are under construction. The 413,000 figure was higher than the roughly 373,000 rooms in its global development pipeline in June 2019.

Nassetta defended the company’s performance, citing data from market research firm STR that Hilton’s year-to-date net additions were higher than all of its major branded, U.S.-based competitors.

The apparent delays in the opening of properties since last year have explanations that include supply-chain and labor challenges. In the second half of the year, rising interest rates could increase capital constraints for hotel owners and developers.

Acquisitions aren’t a likely tool for growth.

“Looking ahead, Hilton sees ample room to grow its organic portfolio of 18 brands, with what we sense is a limited-to-almost-zero appetite for brand M&A [mergers and acquisitions], given its organic opportunity and ability to fill in select white spaces and just better overall economics associated with organic growth,” wrote Joseph Greff of JP Morgan Research in a recent report.

Business Travel Is Recovering

In the quarter, Hilton saw business travel bookings at about 95 percent of pre-pandemic levels. In June in the U.S., the company hit 2019 levels for business travel.

A newly launched marketing campaign that includes Paris Hilton as a brand spokesperson may further help the company later this year, it said.

The company has pretty good wind in its sails to navigate choppy economies in the U.S., Europe, and China. International travel will pick up. Small-and-medium-sized businesses have shown an appetite to travel, with their revenue contribution to Hilton being largely back to 2019 levels.

Leisure transient travelers have been contributing more revenue to Hilton lately than they did in 2019.

Group bookings are also recovering, and will come close to recovering to, but not likely actually hit, 2019 levels before the end of the year, Nassetta said.

Overall Hilton expects many of its rooms to be filled this year.

“Systemwide in the second half of the year we expect occupancy to be in the 90s [90 percent occupied or better],” Nassetta said — suggesting performance may be five points off of pre-pandemic levels but with rates likely being higher than in 2019.