US travel rebound is thrown off course by delta variant

Worries about the highly transmissible Delta variant are finally starting to have an impact on America's domestic travel demand. But the slowdown is likely more of a bump in the road than the beginnings of a serious detour.

The pandemic travel rebound has always been geographically spotty. Many Asian and European markets have been slow to bounce back, partly because of tricky-to-navigate travel restraints, whereas Americans' appetite for taking trips has surprised even the most bullish of optimists. The biggest US airlines all predicted the domestic recovery would keep building momentum and none of them reported any negative effects on booking patterns from the Delta variant when they released their second-quarter earnings. But that was more than two weeks ago and a lot has changed since then. As the peak summer vacation season draws to a close, cases have continued to spike higher and face coverings are becoming commonplace again after the US Centers for Disease Control and Prevention recommended even the vaccinated don masks indoors to help stem the Delta variant's spread. Against that backdrop, some people seem to have decided that maybe they don't need to take that trip after all.

Royal Caribbean Cruises Ltd this week flagged a "modest" slowdown in near-term bookings. The pullback was most noticeable in markets where the Delta variant is pervasive, including Florida, Chief Financial Officer Jason Liberty said in an interview with Bloomberg News. The company now expects to have its full fleet sailing again by the spring of 2022; it previously said most of its ships would return to the seas by the end of this year. Frontier Airlines' parent company also said bookings had softened more than normal for this time of year because of the Delta variant, costing the ultra-low-cost carrier as much as $30 million of revenue. If Frontier had reported results two weeks ago, "you wouldn't have had all this new information about the Delta variant," Chief Executive Officer Barry Biffle said on a call Wednesday to discuss second-quarter results. "I hate to be the bearer of news that masks and the resurgence is an impact on economic activity, but it is."

Aggregated daily credit- and debit-card spending on airline tickets for the week ended 31 July was down about 19% relative to 2019 levels, according to an analysis by Bank of America Corp. That compares to a trend line of down 12% as of 24 July. The biggest drop-off has been for purchases at non-US airlines as many countries revisit travel rules in light of the Delta variant. But the summer spike in domestic demand also appears to be waning. In a sign that the industry is worried about further disruptions caused by Delta or other variants should Covid-19 continue to spread, United Airlines Holdings Inc on Friday announced it would require vaccinations for its workers by 25 October at the latest. It's the first major US airline to do so, and the move follows the lead of companies including Tyson Foods Inc, Walmart Inc and Alphabet Inc's Google.

Leisure bookings were always going to taper off to some degree even without the Delta variant; there are only so many trips that people want or need to take for vacation or to reconnect with family. But the hope of airline executives was that the corporate side of the market would start to pick up some of that slack after the Labor Day holiday as more workers returned to offices and schools reopened. There was already a disconnect between airline CEOs' optimism about a full return to business travel and the perspective of their counterparts at other large corporations. Perhaps the Delta variant is a necessary reality check.

Just this week, Microsoft Corp, BlackRock Inc and Wells Fargo & Co joined Apple Inc and Google in pushing back their return-to-office plans by at least a month to October. From a practical standpoint, no company is going to start sending workers out on the road the same day it brings them back to the office. That pushes a travel restart for the above companies and others in a similar spot until more like November. Anyone reading the news lately has seen the reports of mass flight cancellations and stranded passengers as staff shortages crimped airlines' ability to adjust schedules after weather delays; that challenge may only get worse as we get into the season of ice and snow. Such headaches aren't exactly conducive to corporate travel. Most budgets also reset at the end of the year, so that would be a natural moment to factor in a snapback in travel costs. Taken together, these developments signal that a meaningful pickup in business travel looks increasingly unlikely before 2022. Or maybe later: Amazon.com Inc is delaying its return to office until January.

Even a moderate slowdown in the travel recovery may require some recalibration of 2021 estimates for airline earnings, which had been moving up in recent weeks. In the worst-case scenario, the return to profitability in the third and fourth quarters heralded by United and Delta Air Lines Inc may be postponed. Notably, JetBlue Airways Corp, one of the last of the major US airlines to report results, echoed its rivals in noting no impact thus far on demand from the Delta variant but would only commit to turning a profit for the months of July and August, rather than the quarter as a whole. "We've been here before," CEO Robin Hayes said on a 27 July call. "We still are concerned that a spike in variant cases or other concerns could impact future demand."

That being said, this week also brought the news that Parker-Hannifin Corp is buying Meggitt Plc — a maker of airplane brakes, motion controls and fire protection systems — in a deal valued at about $10 billion including the assumption of debt. This is the first major aerospace manufacturing consolidation play since Woodward Inc and Hexcel Corp called off their $7.5 billion merger last April in the darkest days of the pandemic. Parker-Hannifin's offer is a 71% premium to the relatively low level Meggitt shares closed at last week but it's also a 15% premium to the target company's pre-pandemic high. It's Parker-Hannifin's largest takeover by a long shot and the Meggitt purchase will nearly double the size of its aerospace business. This is not the kind of deal a company does if it's pessimistic about the long-term trajectory of air travel.

There's a sense of de ja-vu in the wave of announcements about canceled events, work-from-home mandates and fresh lockdowns in other parts of the world. As much as we all might hate it, the Delta variant means more Covid disruptions. One of the lessons from Covid 1.0, though, was that as much as old habits may be disrupted in the short term, they are quite stubborn over the long term. Business travel remains an open question, but if earlier iterations of Covid didn't permanently curb Americans' love affair with vacationing in places far enough away that you need a boat or a plane to get there, it's unlikely that the Delta variant will. It's encouraging for the travel industry that customer deposits for cruise bookings — which tend to be made further in advance — are significantly higher for 2022 at Royal Caribbean than they were before the pandemic at this same point in the year. The travel recovery isn't canceled, but like too many actual flights these days, it does appear to be at risk for delays.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.