Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Tom Fitzgerald:
Hello, welcome back to the Wheels Up Podcast on the TD Cowen Insights series. My name's Tom Fitzgerald, and I'm the Lead Airlines Analyst here at TD Cowen, a division of TD Securities. I'm joined today by my colleague Moshe Orenbuch, who covers specialty finance here at TD Cowen. We're recording this today on August 13th, 2025, and we're going to recap some key takeaways that we saw from airline and specialty finance earnings this past reporting season.
Moshe, I can tell you for the airlines, we saw encouraging stabilization in demand versus what we saw earlier this spring. And management teams were by and large constructive on this outlook for the second half of the year, in particular about corporate demand in the fall and European travel demand that is now elongated into the shoulder season. So, what historically was a strong summer travel period is now a year-round, maybe like a 10 month of the year type of demand window, but that gives the larger airlines much better visibility into the back end of the year than they normally were operating with. So, we're feeling pretty good and the airlines seem to be getting their planes on time. What are you seeing on the finance side?
Moshe Orenbuch:
One of the things that we've seen is that in general, the card guys have pretty much said that spending continues without any significant interruptions. That's across the spectrum of types of spending, including travel, but no major acceleration either. Amex has generally been more constructive about front of cabin spend, I think the trend that was echoed by some of the large airlines as well.
Tom Fitzgerald:
Yeah, we've certainly seen premium continue to outperform main cabin and the airlines with larger exposure to premium demand, larger exposure to international demand where international premium tends to be the real sweet spot and even domestically, the transcon, any longer stage length, you're more likely to buy up to that higher fare product.
I don't know if you've shared anything lately on the tax bill or with interest rates cuts possibly coming over the next 18 months, but it seems like that trend could continue, maybe even widen further from here. Perhaps it broadens out next year and we see main cabin leisure start to catch up, but in the fall it seems like premium is still in pole position for coming out of Labor Day. But, what do you think?
Moshe Orenbuch:
I would generally agree. I think the concern had been that there would be even sharper cutbacks from middle income consumers, given the economic uncertainty that was out there. And at least thus far, what we constantly have been saying is, so far, so good, that there hasn't been a significant cutback from that consumer base. It's something that constantly people are concerned as some of the impacts of tariffs, some countries and the like and what that would have an impact on the overall economy. I think that's been a little bit pushed out into the future, so the risk might still be out there, but again, so far, so good.
Tom Fitzgerald:
Yeah, yeah, agreed. Are you hearing, student loans are often in the news and I know that the balance sheet health of the consumer is a big part of your focus in the day-to-day. Is that a risk we should be monitoring for the lower end income cohorts?
Moshe Orenbuch:
We're coming up on three years since the federal government actually restarted student loan payments. In October, it will be two years since they actually started reporting to credit bureaus. So, this has been going on for a while and there are some five and change million borrowers who are in default and those people are people that haven't paid in a really, really long time.
I think the cohort that you really have to watch out for is there's seven and change million borrowers that had been in an expected income driven repayment program that under the Biden Administration was supposed to be significantly more beneficial to consumers and they'd have to pay less, that the Trump Administration has now put back as it had been prior to that SAVE program being devised, which was less beneficial. They will start repaying in the next few months. The data that we see, in terms of how much people actually are paying, did take a big step up in early August. So if that continues, I think that would calm some of those concerns, but it's those seven million borrowers I think, not the five million that have defaulted, but it's that seven million that are going to be exiting into an income-based repayment program that would really start to have some impact.
So, I do think there will be, and there's got to be some impact, but I'm not as concerned about it as some of the kind of doomsday scenarios that you've seen out there. People understand it and seem to have budgeted for it. Could have some impact on consumption as we go forward.
Tom Fitzgerald:
The airlines have talked about, especially on the lower end, the leisure carriers, the discount airlines, they've seen a real hot and cold cadence for demand this year in customer sentiment. Where they might have a stretch of weeks where it's really hot and they're taking price and volumes seem really good and they're really encouraged on the year, and if they run right out those trends, it's a phenomenal P&L. And then conversely, it could flip depending on what's happening in the news, we've seen ebbs and flows all year. And I think some of the other, it might've been JetBlue, but I think that what makes it so hard to really plant a flag in the ground on what 4Q is going to look like if you don't have this exposure to the types of customers who are booking further out or the type of markets are proving to be more resilient in these times.
And I think one of the big takeaways for us has really been the importance of revenue diversity, not just this past season but the past few years, whether it was cargo performing really well during the COVID goods demand boom, or loyalty revenues just steady-eddy, really consistent, stable cash flow, international revenues, which has just been phenomenal the last couple of years post-COVID. And really interesting to see, even in the face of all the geopolitical uncertainty that's happened the last few years, obviously it's the biggest pool, the domestic leisure market, but just not having all of your eggs in one basket given all the volatility that presents itself to the industry. But curious if there are any big takeaways so far as you come out of earnings season on your side of the fence.
Moshe Orenbuch:
The data that we get is not as granular as you're going to be getting, and so probably not a ton incremental there. I would just say as an aside for American Express, where the airline category had been the largest category within T&E spend, it's now actually been overtaken by dining within American Express, which is a little bit of a reflection of the younger consumers taking the premium cards and allocating more of their resources to those types of experiences instead of airline travel, which has been kind of interesting. That's something that's been true for the last, I think two quarters, not necessarily just from the second quarter, but something that had been noted.
Tom Fitzgerald:
That's fascinating, the demographics. I'm curious if you're hearing any other interesting trends you think investors should be monitoring on the demographic front because it certainly comes up a lot on the airlines with that elongation of the European travel season I talked about it a few minutes ago. That in part is due to a lot of baby boomer cohorts who are shifting some of their travel that used to occur in July and August into September, October when it's a little cooler and they benefit from having, they're a little more flexible on time. They by and large have very nice nest eggs, so they tend to be more price and elastic and have the desire to sit up front at the front of the plane. The Gen Z for sure, and the airlines often talk about getting in early with the life cycle of the consumer and trying to get them signed up to those [inaudible 00:08:01] earlier in their careers. So, love to hear what we should be thinking about on that end.
Moshe Orenbuch:
That kind of discussion from AMEX typically comes about with respect to their proprietary products, the Platinum card, but it does extend to their other fee-based products, which include the Delta Reserve kind of cards. We just don't get it broken out product by product for them. So we don't have a great insight into that, only have it sort of in the aggregate level.
Tom Fitzgerald:
Yeah. Another thing that I'd love to hear your take on this is the non-airline, non-credit card consumer partnerships. We've seen different, Delta's been probably the leader in this, but we've seen other airlines do it as well. Whether it's Delta and Starbucks and you can link where you're earning miles for the card spend, or it might be another partner with YouTube and bringing that content into the plane, but there's presumably other partnership angles like that and it's this real arms race almost, to build a portfolio. In the same way that your network can really enhance your value prop all different places a consumer can take. If you can really collect all of this in one basket and just enhance the stickiness, it could be really, you start to think about the powerful flywheel effects that could drive off of that. And I think it's just getting in the early stages and there's a lot more interesting things airlines can do at least. But again, I'd love to hear with AMEX and your other, just covering the space for so long.
Moshe Orenbuch:
Yeah, well, I think this is always going to be a question of who's consumerism, right? So if you ask the credit card company, they think it's their consumer, if you ask the airline, they think it's their consumer. And whomever is going to be more successful bundling those services on, I think is going to be the one who is the winner. I almost hesitate to say this, but I believe, and this is a belief, I don't know if it's empirically true, that consumers generally have more of an affinity for a brand like an airline than they do for financial services brands. That's generally the way I think it's worked, and so it wouldn't surprise me to see those sorts of partnerships coming out of that airline branding.
What the card programs do, is they have a lot of revenue that are generated and then a big chunk of that is shared with their partners and the airlines are kind of front and center in those partnerships. If I were guessing or predicting, I would predict the airlines would have better success at that than the card companies might.
Tom Fitzgerald:
That's a great point, Moshe, in terms of the brand affinity. Sometimes investors posit that a risk for the airline might be that whether it's deflation of the value of points or potentially more restrictions on what type of perks you're getting with the program, whether it's lounge access or your probability of getting upgraded depending on really... We've seen this trend of people actually buying up the front cabin so that lowers your probability. And whether it's a card from a money center bank that's just maybe has better bang for their buck and it's a risk there, or the low-cost carriers often talk about that as their opportunity where they might be able to give you a better bang for your buck in a loyalty program, albeit opt-in with the worst network.
I think an exciting opportunity for the airlines in the coming years will be as they grow their supply of premium seats, it will kind of give them an opportunity to refuel the carrot and stick approach with the loyalty program. And I think that might drive more engagement, more spend, it might remind people of the value prop. If you actually feel like you have an opportunity of getting upgraded, whether even if it's just a premium economy, that can make a huge difference in how much value you see in the program. So, I think it can work out again as we navigate into the second half of the decade.
Moshe Orenbuch:
I mean, a couple of things in there to unpack. The first is that the premium travel consumer does value that loyalty a lot more generic rewards points, right? So the high-end cards at the major airlines and bank partners, whether it's Delta and AMEX or Citi and American, and United and Chase, they're all very integrated, very heavily integrated and do carry very significant benefits. And having said that, that's a fairly small number of people for whom that's really important. As you grow the supply of premium seats, they will have those benefits.
There has been a bit of an issue in terms of lounge crowding and restricting lounge access that has been something of an issue, and some of the lounge providers are starting to do sidecar lounges for that overflow. So both of those are not things that you can kind of just flip a switch and add capacity. So, it will be interesting to see how the airlines and the card companies manage that process.
Tom Fitzgerald:
Just to switch gears, Moshe, in addition to consumer finance companies, you also cover the aircraft leasing companies. So, I'd love to hear the supply chain. We published the latest edition of our Heavy Metal series with our colleague, Gautam Khanna on the A&D team this morning. It seems like we're actually finally starting to see a little bit of improvement in the supply chain, and that has a lot of implications, whether it's United where the [inaudible 00:13:11] a very big part of their long-term business plans, or even GTF operators like JetBlue or Volaris who are seeing aircraft on the ground start to improve a little bit. But what are we hearing out out of Aercap in air lease and that side of the fence?
Moshe Orenbuch:
So they've generally been saying that Boeing deliveries have increased speed and are hitting or exceeding their prior goals, whereas a little bit of slippage from Airbus. So on balance, they're still sluggish, I would say, but not worsening. Not necessarily materially improving in the aggregate.
What that's caused them to do is look to other areas to invest, sometimes it's buying their own stock. And we had a note out that following on your note on Spirit's issues, that Aercap might actually be looking to take a larger aircraft investment through the planes and they've had a deal with them. And so I think that, I mean, Aercap has got probably three and a half billion of excess capital. So, you couldn't buy back on a 2020 $1 billion market cap, you can't buy back $3 billion of stock like that. So, it would be good for them to have other opportunities to deploy that. And I think perhaps if there are some airlines that are struggling, in the last few years there's been relatively few. So I think that's something that could be constructive as another outlet for that capital. And over the next several years, as the OEMs do deliver, is hoped that they deliver at a faster pace.
Tom Fitzgerald:
Okay, well that's encouraging. Aercap's definitely proven themselves to be quite adept at making shrewd moves and different types of restructuring volatility events in the past. So, exciting times to come. I think that'll be it for today. But Moshe, is there any closing thoughts you'd like to leave us with?
Moshe Orenbuch:
Look, I think the loyalty space is very interesting. The one thing that I probably should mention is that there is a bit of a cycle going on at the high-end card space, a little bit of competition. You've got Chase having refreshed the Sapphire Reserve, AMEX talking about refreshing Platinum. While neither of those are specifically linked to an airline, there are airline benefits and travel benefits that each of those cards promotes. And so, that's going to be this summer and fall's interesting aspect in the card business that relates to travel.
Tom Fitzgerald:
Loyalty will definitely continue to be a huge focus area for the airlines, big part of the arms race as they invest, continue to differentiate the product and widen the mode, especially for the industry leaders like a Delta or United. And we'll be watching consumer travel, or corporate travel rather, into the fall looking for confirmation that that continues to improve. And we'll also be watching for indications on the health of close-in bookings and the state of domestic leisure demand.
That's all for this edition of the Wheels Up podcast. Thanks again for joining us, and we'll be back shortly.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.
