American airlines have had a busy summer, not without some operational disruptions. This summer also saw surprisingly high tariffs, partly matching the inflation seen by consumers on all products. The industry generally has a high price elasticity, meaning that higher fares normally mean fewer people traveling. But this summer, demand was high even with the high fares. Most US airlines made money in the second quarter, so some think the high fares may be here to stay.
But we are now at the end of August, which means the summer travel season is officially over. The leaves may not have changed color yet, but it’s fall for American airlines. Airlines measure revenue not only in absolute terms, but on a unit basis. The most common is “RASM”, or returned by ASM. This measures the amount of money the airline collects for each seat-mile it operates. This unit metric makes it easy to compare different companies or different time periods, even if the number of flights changes. America’s largest airlines are facing lower RASM, which means weak revenue this fall, due to five specific realities:
Fewer leisure travelers
With the end of summer travel, the rush for vacationers is also ending. But that’s more than just a normal seasonal dip, as this summer featured what some have called a “voyage of revenge.” The idea here is that after two summers where many stayed at home, or near home, this summer has had a large number of travelers ready to take flight. The fact that high tariffs have not deterred demand supports this view.
The industry will have a better idea of what normal leisure demand might be like this Thanksgiving or in December. A big part of the demand this past summer and fall was to see families, as hotel bookings weren’t as strong and people were willing to get together as families even when they weren’t. weren’t ready to mix with many strangers. So the “revenge” aspect of the summer leisure rush is unlikely to recur when the typically family-oriented demand comes along with the holiday season.
Price Sensitivity Return
Airlines are often used in economics courses as an example of a very price-sensitive industry. Budget airlines have used this reality to lower fares and create new demand, rather than simply stealing share from others. Airlines have seen customers swap destinations when fares to one location are lower than another considered similar. When fares to Cancun are higher than to Punta Cana, for example, more people show up in the Dominican Republic.
This summer has seen a pause on this elasticity, but price sensitivity should return to normal now that summer travel is over. In Q2 revenue reports, most airlines reported lower volumes than 2019 but higher revenues, due to higher fares. The likelihood that leisure prices can sustain 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 seasonally low period. Fewer leisure travelers are each paying less, which puts a lot of pressure on the measurement of unit income.
Business travelers won’t fill all the void
America’s biggest airlines used to run the fall because while leisure travel always dwindled in late summer, business travelers filled the gap until the end of summer vacation. year. Business travelers did not create the volume of the leisure base, but paid three to five times more for their tickets. This means that industry load factors would drop and airlines would fly a little less and use that time for aircraft maintenance and crew vacations.
In addition to reporting lower volumes on higher fares, major U.S. airlines each reported business travel at 70% to 80% of 2019 volumes. Like the leisure base, some airlines airlines reported higher business revenue on even higher fares than normal for this group. A big revenue issue for America’s largest airlines is how much of the revenue void business travelers will fill this fall. The pre-pandemic focus on trade shows and conventions during this period suggests that travel in fall 2022 will not be as significant, as trade show volumes have yet to return to 2019 levels. Other elements holding back business travel, including increased convenience with video services and sustainability-focused businesses, will also affect business travel this fall. Ultimately, business travelers cannot be counted on at the same time as 2019 to make the fall work, which means airlines have to fly even less or accept a lower RASM for the flight that they choose to operate.
Falling U.S. dollar limits international travel
American airlines received a big international boost in June when the United States stopped requiring a negative Covid test before boarding a flight to the United States. This change was followed by an increase in international flights booked and saw airlines rush to add trips. That makes sense, because the risk of being stuck, at their own expense, to stay about an extra week was reason enough not to fly abroad. Some felt that fall international travel will have its own season of revenge this fall, as this type of travel has been difficult for the past two years.
Just as this industry has this bright horizon, it is being hit by the weakening US dollar which is making these trips more expensive for US travelers. Everything American travelers would buy, including their hotel and food, is more expensive because of it. While the trip can now happen without a big covid risk, the trip is much more expensive. The price sensitivity that accrues to domestic travel could also affect international travel, and the major US airlines that offer most of that travel therefore cannot expect domestic weakness to be offset by international strength.
Operational setbacks keep some travelers waiting until spring 2023
On top of all these macro-economic impacts, US airlines also continued to operate unreliably, primarily due to labor shortages. The likelihood of your flight being canceled has increased dramatically and airlines have pushed back their fall schedules in an attempt to operate more reliably. Domestic flights have seen this in the summer, but higher fares have allowed airlines to do so with less risk. This is especially risky for businesses, which may choose to use video rather than fly this fall given the rising cancellation rate. Some companies have already said they will continue to suspend employee travel until airline industry reliability returns.
When you add this reality to the other issues mentioned, it suggests that America’s largest airlines are in for a real RASM shock this fall. Airlines could be looking to the spring of 2023 before they can start to see what a new normal for air travel demand looks like. This will likely include a leisure base that is not unusually larger than seasonal norms and returns to high price sensitivity, and business travel that stabilizes at around 80% of 2019 volumes.
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