Airlines usually go on sale when they’re trying to stimulate demand for weaker booking periods, so these promotions aren’t ideal for the fall. For the better part of the last 18 months, airlines have had more demand than the country’s aviation infrastructure can handle. There are still logjams in the airplane manufacturing supply chain that prevent carriers from delivering the jets they order, and other structural capacity constraints, especially at the busiest airports, that limit the number of flights they can operate each day. But that balance could change.
While the US consumer has proven to be stronger than many economists and investors expected, credit card payments are rising, the savings built up by this group during the pandemic are about to run out and there are signs that inflation is starting to influence spending decisions. Pool Corp., a distributor of pool equipment and supplies, cut its full-year guidance last week and said some customers are deferring discretionary purchases such as heaters or upgraded cleaners. Trips have been a worthwhile expense for many people after pandemic restrictions temporarily took vacations away from the table, but there isn’t much left of the “reciprocal travel” phenomenon at this point as consumers stockpile their finances. Average booked rates at Omni Hotels & Resorts properties — primarily domestic — moderated because vacationers weren’t splurging on fancier accommodations as often, Chairman Peter Strebel said in a June interview. Like airlines, the company is relying more on promotions this year to attract leisure travelers than last year, he said.
U.S. airlines’ first-quarter earnings broadly disappointed amid a lack of business demand and a shift in traditional booking patterns that made the weak months of January and February even weaker. The risk is that the pattern will repeat itself once the summer travel boom has run its course. Corporate traffic recovery is stuck at around 25% below pre-Covid levels for most airlines; if anything, bookings seem more likely to downshift in the near term as businesses cut costs. The total operating costs of investment-rated companies by S&P Global Ratings decreased 5.3% in the first quarter, indicating that companies have reduced day-to-day costs such as salaries and business travel, according to a report this month from S&P Global Market Intelligence.
The domestic unit revenue of Delta Air Lines Inc. decreased 1% in the second quarter relative to the year-ago period, while domestic passenger revenue for each seat mile flown decreased 2.4% at United Airlines Holdings Inc.; sales on a like-for-like basis with American Airlines Group Inc. fell 3%. American said total unit revenue could fall as much as 6.5% in the current quarter, worse than analysts expected. The guidance for the second half of the year “seems to reflect pressure on the domestic market, balanced by continued international strength,” TD Cowen analyst Helane Becker wrote in a report.
The average price in June for a round-trip ticket to the US booked through travel agencies was $555, down about 8% from the period last year, according to data from the Airlines Reporting Corp. That’s the third consecutive month that fares have decreased from the level of 2022. Fares are still about 8% above the level of 2019, and the continued constraints of the system provide a kind of price floor.
But the airline deficit in the US is not as bad as it is abroad. The capacity to sit at home has actually recovered to the level of 2019, although it remains about 16 points below where the market would have been if the pandemic had not interrupted growth, according to an analysis by Melius Research analyst Conor Cunningham. In the international market, a greater number of airlines went bankrupt, with low-cost, long-haul carriers – including SAS AB and Norwegian Air Shuttle ASA – hit particularly hard. In the depths of Covid, the idea of packing people into twin-aisle jets for trips abroad seems a relic and wide-body planes are being retired at a much higher clip than their narrow-body siblings that are more popular on domestic routes. The result is a 39 percent deficit point in international aircraft supply relative to what is needed to support demand, Cunningham’s analysis shows.
Delta executives said travel patterns indicated that the international summer vacation season continued into October after the pandemic, especially in the warmer, southern parts of the continent. A look at Europe’s heat domes this month may explain why autumn looks so good to some travelers. The extended international travel season will help offset any shortfall in the domestic market for Delta and United, which have significant business overseas. But the resilience of other post-pandemic travel habits that have helped airlines make up for slower corporate traffic — such as leisure travelers pushing for premium seats and taking advantage of work-from-home policies to book more weekend trips — have not been tested in an economic downturn.
Even in Europe, where almost everyone seems to be on vacation this summer, some cracks are emerging in the demand picture. Ryanair Holdings Plc said this week that it may need to offer lower fares in October and November to stimulate demand for seating capacity that is expected to be 25% above pre-pandemic levels this winter. “We’ve noticed in the last couple of weeks a slight softening of near-term fares in late June and early July; there’s nothing I’m too worried about at the moment,” said Ryanair Chief Executive Officer Michael O’Leary on a call to discuss the company’s quarterly results. But there is “a degree of customer resistance to higher fares.” While last year’s customers paid prices higher than Ryanair expected to lock in seats for summer vacations, now “there’s a kind of leveling out,” despite higher fares relative to 2022, he said.
Leveling out is probably the best way to describe what’s happening in the air travel markets. The planes did not return to the pandemic. But stocks of the biggest carriers have taken off like jet planes in recent weeks, bouncing back from a slump after the region’s banking crisis sparked fears of a recessionary pullback in consumer spending. Shares in Alaska, for example, hit their highest price in more than a year earlier this month. United shares last week touched a more than two-year high. Investors may have stopped worrying about the need for air travel any time soon.
More From Bloomberg Opinion:
• An SOS From Travel Hell This Summer: Brooke Sutherland
• Turn Out the Lights, Is the Consumer Party Over?: John Authers
• The World Doesn’t Have Many Airplanes: Brooke Sutherland
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. A former M&A reporter for Bloomberg News, he writes for the Industrial Strength newsletter.
More stories like this are available at bloomberg.com/opinion
