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Still Another Headwind for the Economy — The Airline Crisis

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Insights and Market Perspectives

Still Another Headwind for the Economy — The Airline Crisis

Author: Greg Valliere

June 30, 2022

EVERY FEW WEEKS a fresh supply-demand crisis hits the economy; in the spring it was baby food formulas, and now it’s the airlines. A very rough July 4 holiday looms for fliers, amid a growing feud between the industry and the Federal Aviation Administration.

ABOUT 1,800 FLIGHTS HAVE BEEN CANCELLED already this week, with far more coming in the next few days. In fact, many industry experts have already written off this weekend as a likely disaster and are hoping that additional hiring can prevent a similar crisis during the Thanksgiving and Christmas holidays.

THIS IS FINALLY GETTING ATTENTION FROM CONGRESS, which is demanding answers from the FAA about air traffic controller shortages. The far bigger issue is an acute shortage of pilots, who retired in droves during the pandemic without much re-hiring or new hiring as Covid receded.

IN A DIFFICULT WEEK OF FLYING, we got hit with flight cancellations, one of which was blamed on Covid, even though the virus has largely subsided. A more likely factor is money — the industry got billions during the pandemic and used very little of it to stay anywhere close to full staffing.

THE INDUSTRY GOT ABOUT $54 BILLION during the pandemic, which will be a focus of congressional hearings later this summer. A vocal critic is the Air Line Pilots Association, which said this week “it is clear to all that the airlines have mismanaged this critical relief package, which was specifically designed to make certain that airlines were prepared to meet the increase in travel demand we are experiencing today.”

OUR TAKE IS THAT THE INDUSTRY was blindsided by the astonishing snap-back in consumer demand, but a pent-up desire to travel seemed inevitable as the virus waned. The industry didn’t anticipate this?

CRITICISM OF THE FAA’s slow reaction has clouded the political future of Transportation Secretary Pete Buttigieg, who has been on the defensive in recent weeks. Once considered a leading candidate for the presidency, Buttigieg is now caught in finger pointing between the industry and his agency.

THIS IS STILL ANOTHER HEADACHE for the Biden Administration, as travel inflation soars. The only way the industry can muddle through this crisis is to pay sign-up bonuses and much higher salaries, which are being absorbed — along with higher fuel prices — by consumers.

TO BE FAIR, NO ONE HAD A CRYSTAL BALL as the worst pandemic in 100 years came to a close; there was no template to grapple with surging demand and shrinking supplies. The Federal Reserve got it wrong, and scores of industries were caught flat-footed. Generous Covid aid from Washington simply drove demand higher for computer chips, energy, food, etc. The Ukrainian war exacerbated the problem but even without the war there was a glaring supply/demand imbalance.

SO NOW THE AIRLINES WILL GET THE BLAME for taking a huge bailout without keeping their staffing at adequate levels. There will be more crises; the nursing profession is teetering on the brink of crippling labor shortages.

WE HAVE ARGUED FOR THE PAST YEAR that the inflation problem is much more than supply shortages of key commodities. There’s a huge labor component, as employers — from big corporations to mom and pop businesses — frantically raise their compensation to retain and attract workers. It may take months to restore a supply-demand balance in much of the labor market, as this weekend’s airline debacle will show.


The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

©2023 AGF Management Limited. All rights reserved.

Written by

Greg Valliere

Greg Valliere

Chief U.S. Policy Strategist

AGF Investments

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