The US government shutdown is beginning to bite into aviation and travel, as alarm bells ring over the growing costs of the lapse in funding.
The warnings come as US airlines hurry to comply with a new order from the Federal Aviation Administration, which imposed a 4 per cent reduction in flight capacity at major airports, citing safety concerns because of mounting pressure on air-traffic controllers and airport security workers.
They are deemed as essential employees and must work during the government shutdown, although tens of thousands are doing so without pay.
More than 850 flights travelling into, out of and within the US were cancelled on Friday, according to tracker FlightAware. Separate data from aviation consultant Cirium showed 780 US flights – or 3 per cent – had been cancelled out of the 25,375 scheduled for Friday, which it described as a “very good on-time operational performance number”.
The cuts are set to increase to 6 per cent on Tuesday and then 10 per cent by November 14 if the shutdown is not resolved. Transportation Secretary Sean Duffy said those cuts could stretch to 15 or 20 per cent if the shutdown does not end “relatively soon”.
The reduction does not apply to international airlines. Qatar Airways said it is not experiencing an operational impact on its US flights. Emirates Airline advised customers to arrive at airports at least four hours before departure time because of extended security screening times.
While flight reductions could mean fewer empty seats for airlines, which are offering anxious customers refunds over potential disruptions, larger cuts are sure to bite into their balance sheet, said Beau Roy, senior managing director at FTI Consulting.
“When you get into 10 and 20 per cent, it's going to hit the bottom line for airlines, no doubt. They're going to lose revenue,” he said.
'Going to be problematic'
American Airlines chief executive Robert Isom said he does not anticipate significant disruptions in the near term, but that could change the longer it goes on.
“This level of cancellation is going to grow over time, and that's something that is going to be problematic,” he told CNBC.
Linus Bauer, founder of UAE-based consultancy BAA & Partners, expects the growing costs to be exponential the longer the shutdown continues. He forecast weekly aviation losses could surpass $1 billion, with broader macroeconomic losses trending towards $20 billion to $25 billion.
Projections from the non-partisan Congressional Budget Office show the US economy is losing between $10 billion to $20 billion a week.
“To put it simply, every additional week the shutdown persists compounds the disruption – because aviation operates as a finely tuned system,” Mr Bauer said.
Costs could continue to mount during the Thanksgiving holiday period later this month, when a record 31 million passengers are expected to fly, according to Airlines for America.
BAA & Partners
If the shutdown stretches into Thanksgiving, it could lead to significant congestion or extended delays for customers.
“The window is narrowing fast. If funding isn’t restored within the next week or two, the industry will struggle to stabilise operations before the Thanksgiving surge,” Mr Bauer said.
So far, there is no end to the shutdown in sight. The US Senate was due to vote on a short-term funding measure after 14 previous attempts on Friday, but that, too, was not expected to pass. Democrats are demanding that Republicans negotiate on extending healthcare subsidies before reopening the government, but Republicans say the government must reopen first.
Republicans hold a 53-47 majority in the legislative body, but need 60 votes to open the government.
Trading Economics projected a 60-day government shutdown would bring a $3.8 billion loss in travel spending, with total economic losses reaching $8.4 billion. And it warned losses could quickly surpass its estimate.
White House economic adviser Kevin Hassett acknowledged the shutdown is worse than expected. Speaking to Fox Business, he said the economy could abruptly sour.
“Travel and leisure is a place that's really being heavily hit right now, and if it continues to get hit, if the air travel thing goes south for another week or two, then you could say that they would have at least a near-term downturn,” he said.
Compounding effects
Jay Zagorsky, a professor at the Questrom School of Business at Boston University, said more important than the flight reductions is the impact the uncertainty will have on consumer spending. A loss of confidence in airlines getting travellers to their destinations on time could force people to rethink their plans.
“The uncertainty causes a lot of people to reduce their spending,” he said.
The hits to the travel sector are part of a cocktail of uncertainty for the US economic outlook, which has been exacerbated by the government shutdown. At 38 days and counting, the shutdown is the longest in US history.
Conflicting jobs data this week also fuelled that economic uncertainty.
The University of Michigan's monthly consumer sentiment survey posted a reading of 50.3, a 6 per cent monthly decline and a fall of roughly 30 per cent year-on year, led by a drop in current personal finances and a decline in year-ahead business expectations. The university's report said growing concern about the government impasse topped consumers' fears, offsetting stock market enthusiasm.
This comes off the back of a report on Thursday that showed US estimated job losses hit a 16-year high last month on cost-cutting and artificial intelligence adoption. Job cuts were recorded at 153,074 for October, up 183 per cent from September and 175 per cent year-on-year. However a separate report from processing giant ADP on Wednesday showed the economy added a more-than-expected 42,000 private-sector jobs for the month, suggesting the soft labour market is not worsening.
At the same time, big-name companies including Amazon, UPS and Target have announced layoffs in recent weeks.
Mr Zagorsky said the flight reductions alone will not do broad harm to the economy.
But he said that air traffic slowdowns, combined with a growing number of other factors, will have a compounding effect for the world's largest economy.
“It's a bit like a death by a thousand cuts,” he said.
