US airlines have had a busy summer, not without some operational disruptions. This summer has also had surprisingly high rates, in part equal to the inflation consumers are seeing across all products. The industry tends to have a high price elasticity, meaning that higher fares typically mean that fewer people travel. But this summer demand was high even with the high rates. Most US airlines made money in the second quarter, so some think high fares may be here to stay.
But now it’s the end of August, which means the summer travel season is officially over. The leaves may not have turned color yet, but it’s fall for US airlines. Airlines measure revenue not just in absolutes, but in units. The most common is “RASM” or Revenue per ASM. This measures how much money the airline collects for each seat mile it operates. This unit metric makes it easy to compare different airlines or different time periods, even if the number of flights changes. The largest U.S. airlines are facing a lower RASM, which means revenue weakness this fall, due to five specific realities:
Fewer leisure travelers
With the end of summer travel, so does the rush of leisure travelers. But it’s more than just a normal seasonal layoff, as this summer featured what some have called “revenge trips.” The idea here is that after two summers in which many stayed at home, or close to home, this summer has had an unusual situation. large number of travelers ready to take to the sky. The fact that high tariffs did not deter demand supports this view.
The industry will have a better view of what could be normal demand for leisure that could happen this Thanksgiving or in December. Much of the demand last summer and fall was to see families, as hotel bookings were not as strong and people were willing to meet with family even when they were not ready to to be with many strangers. So the “revenge” aspect of the summer leisure rush probably won’t play out when the normally family-oriented demand arrives with the end-of-year holidays.
Return of price sensitivity
Airlines are often used in economics classes as an example of a highly price-sensitive industry. Low-cost airlines have used this reality to lower fares and create new demand, rather than stealing shares from others. Airlines have seen customers switch destinations when fares to one location are lower than another considered similar. When rates in Cancun are higher than in Punta Cana, for example, more people show up in the Dominican Republic.
That elasticity has stalled this summer, but price sensitivity is expected to return to normal now that summer travel is over. In second-quarter earnings reports, most airlines reported lower volumes than 2019, but higher revenues, as a result of higher fares. The likelihood that leisure prices will be able to maintain the high levels of the summer is very low, so airlines will have to lower fares to attract the volume that may still exist in this period of seasonal weakness. Fewer leisure travelers paying less each puts a lot of pressure on the unit revenue metric.
Business travelers won’t fill the entire gap
The biggest U.S. airlines used to make fall work because, while leisure travel always dropped at the end of summer, business travelers filled the gap until the end of the year holidays. Business travelers did not create the volume of the leisure base, but would pay three to five times more for their tickets. That means industry load factors would drop a bit and airlines would fly a bit less and use that time for aircraft maintenance and needed crew vacations.
In addition to reporting lower volumes with higher fares, major U.S. airlines reported business travel accounted for 70% to 80% of volumes in 2019. Like the leisure base, some airlines they reported higher trading income with rates even higher than normal for this group. A big revenue issue for the biggest US airlines is how much of the revenue gap will be filled by business travelers this fall. The pre-pandemic focus on trade shows and conventions in this period suggests that travel in the fall of 2022 will not be as large, as trade show volumes have not yet returned to 2019 levels. Other things holding back business travel, such as increased convenience with video services and companies focusing on sustainability, will also impact business travel this fall. The bottom line is that business travelers can’t be counted on just like in 2019 to make the fall work, meaning airlines have to fly even less or accept a lower RASM for the flight they choose to operate.
Weaker US dollar limits international travel
US airlines received a big international boost in June when the US stopped requiring a negative Covid test before boarding a flight to the US. This change was followed by an increase in international flight bookings and saw airlines rushing to add trips. This makes sense, as the risk of getting stuck, at its price, for staying a week or so was reason enough not to fly internationally. Some have predicted that fall international travel will have its own revenge season this fall, as this type of travel has been difficult for the past two years.
Just as this industry has this bright horizon, they are affected by a weakening US dollar that makes these trips more expensive for US travelers. Everything American travelers would buy, including their hotel and food, is more expensive because of it. Although the trip can now be done without a huge risk of covid, the trip is much more expensive. Price sensitivity returning to domestic travel could also affect international travel, so the big US airlines that provide most of that travel cannot expect domestic weakness to be offset by international strength.
Operational setbacks causing some travelers to wait until spring 2023
In addition to all these macroeconomic impacts, US airlines have also continued to operate unreliably, largely due to labor shortages. The likelihood of your flight being canceled has increased significantly and airlines have withdrawn their autumn schedules in an attempt to operate more reliably. Domestic flights saw this in the summer, but higher fares allowed airlines to do so with less risk. This is especially risky for businesses, who may choose to use video instead of flying this fall because of the increased cancellation rate. Some companies have already said they will continue to curtail employee travel until the airline industry returns to reliability.
When you add this reality to the other issues mentioned, it suggests that the largest US airlines were in for a real RASM surprise this fall. Airlines may be looking at the spring of 2023 before they start to see what a new normal looks like for air travel demand. This will likely include a leisure base that is not unusually larger than seasonal norms and returns to a high price sensitivity, and business travel that is annihilated at something like 80% of 2019 volumes.