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'The cup is half full at the moment' for the travel industry: Moody's Senior Vice President

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Moody's Senior Vice President Jonathan Root joins Yahoo Finance joins Yahoo Finance to discuss the travel industry outlook ahead of the holiday season as COVID-19 cases rise.

Video transcript

JULIE HYMAN: Now, of course, we are in a holiday-shortened trading week here, a lot of folks gearing up to travel for Thanksgiving. What is that going to mean for the industry, particularly as we are starting to see cases tick up of COVID-19 once again not just in the US but internationally?

Jonathan Root is with us now, Moody's senior vice president. Jonathan, good to see you. You know, as we look at some of the recent travel numbers, what do you think is the read through for the airlines? And is predictability back?

JONATHAN ROOT: Well, I'm not sure there's-- I'm not confident in specific predictability, but I think the read through is positive. We're sticking with our positive outlook for the industry. We're looking at it as, you know, the cup is half full at the moment. And it's going to get fuller through the holidays and as we approach spring, notwithstanding that infection rate trends are up right now.

BRIAN SOZZI: And, Jonathan, what's the risk to that upbeat outlook if, you know, we start to get more lockdowns?

JONATHAN ROOT: Well, I think, you know, Brian, that is the risk. If infection rate trends cause governments to make it more difficult to travel or restrict travel, then we are going to see a slowdown. But we saw that going back through 2021. We had the acceleration in the summer. We had the Delta variant. We're seeing strong activity now for the holidays.

As long as the US government allows non-citizens to arrive, we think that trend is going to continue. We think behavior is probably changing as well. With more vaccinations and, you know, the medicines coming, that should be an influencing factor that maybe can allow-- keep the restrictions low enough to allow travel to happen.

JULIE HYMAN: I want to focus in a little bit more in international, specifically, because Germany's Angela Merkel saying this morning that things are as bad as they've ever been in Germany in terms of COVID and the number of infections. How much upside have you been looking for as international travel starts to open back up? I mean, how much was this going to lend to the numbers for the airlines?

JONATHAN ROOT: Yeah, so from our perspective, we see a continuing positive trend. If we look at the US airlines, domestic TSA screenings are at 80% of 2019 level with limited international travel at the moment. So you know, that's helpful for the US airlines. We think that will continue.

On the international front, we haven't seen-- since November 8, we have not seen the uptick in daily screenings-- a meaningful uptick. But that will probably come with the holidays as people are going to connect-- you know, friends and family and the holidays.

And again, the key-- I can't predict which government may become more restrictive in what time frame. And that is the key for the international recovery. We do feel that there is still strong pent-up demand not only for leisure but for business travel and even in international long-haul travel.

Now, those two are not going to pick up at the same pace as did domestic in the US this summer. But we do anticipate that there will be accelerating activity and volumes across the customer base.

BRIAN SOZZI: How concerned are you, Jonathan, about the risk to profits because of the rise in jet fuel?

JONATHAN ROOT: Yeah, so we think the airlines can be profitable with higher jet fuel and where the price of Brent oil is today. You know, the challenge is we're coming through-- this is the recovery phase. So if we were beyond the pandemic normal activity levels, we'd be less concerned for sure.

But we know that historically, when Brent was at $100 a barrel, going back in the 2015 time frame or '13 time frame-- excuse me-- the US airlines had an operating profit margin around 8%. So we think they can be profitable.

Of course, the cost structure is changing. With the pandemic, the industry has made meaningful strides in managing its cost structure. Going back a year ago, the companies were talking about how their margins in 2023 would be better than '19 because of the work they did on their cost structure.

Well, roll forward to today, with cost inflation, not only fuel but other costs, you know, that equation is changing. But we still expect the industry to be profitable as we get toward the end of the pandemic and back to normal conditions.

JULIE HYMAN: Jonathan, thanks so much this morning, and happy Thanksgiving to you. Moody's senior vice president talking to us about the airline's outlook there.

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