The pandemic is gradually retreating and people are flying again in healthy numbers.

You would think this would be an ideal set of circumstances for airlines (and their stock prices) but the opposite has largely been the case.

US-based airlines have been hammered by delays and cancellations and the stocks have generally sold off since May.

This chart signals pain for airlines and, most likely, pain for their customers.

Regardless of whether you are an investor or simply a traveler, you should take great care when booking your holidays and also be prepared to pay up.

*******

For now, the most important fact is that people are flying again.

The TSA logged well over 2 million passengers going through airports last Friday. That was well over double last year and represents a number within spitting distance (~15%) of pre-Covid-19 2019 numbers.

The problem is sort of everything else.

Airlines across the US have been having a very difficult time getting their eager passengers up in the air, let alone to their destination on time.

There are record bookings but also record delays and cancellations. This is leading to public fury and greater strain on airline staff who are, of course, quitting in droves.

The problems are many but may strike you as familiar:

• Airlines are still ramping up their operations from the Covid-19-induced lows.

• Therefore, when the unexpected strikes - bad weather, computer outage, unexpected demand - things go haywire very quickly.

• It seems largely to be the latter, however. Disgracefully, some US airlines have blamed "high winds" as an amazing euphemism for "no pilot/crew."

• There is also rampant "skimpflation:" a new term for the process whereby the price of goods is staying the same but the level of service declines precipitously.

The basic takeaway:

Airlines slashed a lot of payroll and headcount during the dark days of the pandemic and are now, like other parts of the economy, clearly unprepared for the sudden and sharp rebound in demand.

Building back capacity is proving hard in a tight labor market and one where razor thin airline margins make it hard for airlines to compete for the staff they furloughed or fired and have found other work.

They are also furiously squeezing and optimizing every part of their operations. So it is literally fewer people asked to do more and do it with less.

Not surprisingly, this is not going very smoothly when the inevitable hiccup happens. And the strain on their staff is leading to further attrition and retirements at a time where every employee counts.

So, what now?

Well, the worry is that people expect to do a tremendous amount of travel in the coming holiday period and no airline is remotely ready for that.

Domestic airline capacity, measured in seats for sale, will be close to pre-pandemic levels—only 6% less than in 2019 during Thanksgiving week, according to the cool aviation data company Cirium. Furthermore, for December 21-25, airline schedules are down only ~7% versus their 2019 averages for the US domestic market.

The big question to ask yourself (or your airline) is: how much staff and how many planes does your airline have in reserve?

All the evidence is that those who have acted conservatively when it comes to ramping up their capacity such as Delta, Alaska and Jetblue have had suspiciously fewer problems with high winds and delays.

Perhaps the best example of all is Southwest which acted very aggressively and paid a heavy price earlier this autumn but has since publicly stated it will be bringing 12-13% of its flights out of circulation so it can have more capacity.

Last thought:

There is lots of speculation that this "skimpflation" is here to stay and service will take a back seat, possibly for years, until profits have returned.

This may indeed be our collective future but it is worth looking abroad to see what different labor market approaches have produced. Lufthansa, a German airline that furloughed and retained far more of its staff than its American competitors announce this week that it had returned to profit.

Evidently, with a slightly different approach to running their operations, it doesn't have to be this way.....

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.