As Summer Travel Ends, Large U.S. Airlines Face Unit Revenue Challenge

U.S. airlines have had a busy summer, not without some operational disruptions. This summer has been also had surprisingly high fares, in part matching the inflation consumers are seeing on all products. The industry usually has high price elasticity, meaning that higher fares normally means fewer people travel. But this summer demand was high even with the high fares. Most U.S. airlines made money in the second quarter, and so some are thinking high fares may be here to stay.

But it’s now late August, meaning that the summer travel season is officially over. The leaves may not have changed their colors yet, but it’s fall for the U.S. airlines. Airlines measure revenue not only in absolute but on a unit basis. Most common is “RASM,” or Revenue Per ASM. This measures the amount of money the airline collects for each seat mile they operate. This unit metric makes it easy to compare different companies or different time periods, even if the number of flights changes. The largest U.S. airlines are facing lower RASM, meaning revenue weakness this fall, because of five specific realities:

Fewer Leisure Travelers

With summer travel ending, so does the rush of leisure travelers. But it is more than just a normal seasonal drop-off, as this summer featured what some have called “revenge travel.’’ The idea here is that after two summers where many stayed home, or close to home, this summer had an unusually large amount of travelers ready to take to the skies. The fact that high fares didn’t deter the demand supports this view.

The industry will get a better view of what a normal leisure demand might be could happen this Thanksgiving or in December. Much of last summer and fall demand was to see families, as hotel booking weren’t as strong and people were willing to gather with family even when not ready to be around a lot of strangers. So, the “revenge’ aspect of the summer leisure rush likely won’t be replicated when typically family-oriented demand comes with the late year holiday.

Price Sensitivity Returns

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 just steal share from others. Airlines have seen customers swap destinations when fares to one place are lower than another considered similar. When fares to Cancun are higher than Punta Cana, for example, more people show up in the Dominican Republic.

This summer saw a pause on this elasticity, but price sensitivity is expected to return to normal now that summer traveling is over. In the second quarter earning reports, most airlines talked about lower volumes than 2019 but higher revenue, as a result of the higher fares. The likelihood that leisure prices can maintain the summer-lofty levels is very low, so airlines will need to drop fares to attract the volume that may still exist in this seasonally-weak period. Fewer leisure travelers each paying less puts a lot of pressure on the unit revenue metric.

Business Travelers Won’t Fill All the Gap

The largest U.S. airlines used to make the fall work because while leisure travel would always drop at the end of the summer, business travelers filled the void until the late-year holidays. Business travelers didn’t create the volume of the leisure base, but would pay three to five times as much for their tickets. This means industry load factors would drop some, and airlines would fly a bit less and use this time for needed aircraft maintenance and crew vacations.

Along with reporting lower volumes on higher fares, the big U.S, airlines each reported business travel at 70%-80% of 2019 volumes. Like the leisure base, some airlines reported higher business revenue on even higher than normal fares for this group. A big revenue issue for the largest U.S. airlines is how much of the revenue void will the business travelers fill this fall. Pre-pandemic focus on trade shows and conventions in this period suggests that fall 2022 travel will not be as great since trade show volumes are not back to 2019 levels yet. Other things dampening business travel, including increased comfort with video services and businesses focusing on sustainability, will also affect this fall’s business travel. The bottom line is that business travelers can’t be counted on at the same as 2019 to make the fall work, meaning airlines either have to fly even less or accept lower RASM for the flying they choose to operate.

Weaker U.S. Dollar Limits International Travel

The U.S. airlines got a big international boost in June when the U.S. stopped requiring a negative Covid test before boarding a flight to the U.S. This change was followed by an increase in international flights booked, and saw airlines rushing to add trips. This makes sense, as the risk of being stuck, at their cost, to stay for an extra week or so was enough of a reason not to fly internationally. Some have estimated that fall international travel will have its own revenge season this fall, since this kind of travel has been difficult for the past two years.

Just as this industry has this bright horizon, they are hit with a weakening U.S. dollar that make these trips more expensive for U.S. travelers. Everything U.S. travelers would buy, including their hotel and food, is more expensive because of this. While the trip can now happen without big covid risk, the trip is much more expensive. The price sensitivity returning to domestic travel could affect international travel too, and so the large U.S. airlines that offer most of these trips can’t expect that domestic weakness can be offset with international strength.

Operational Pullbacks Making Some Travelers Wait Until Spring 2023

On top of all of these macro-economic impacts, the U.S. airlines have also continued to operate unreliably mostly due to labor shortages. The probability of having your flight canceled has risen significantly, and airlines have pulled back fall schedules in attempt to operate more reliably. Domestic flying saw this in the summer, but the higher fares allowed the airlines to do this with less risk. This is especially risky for businesses, who may opt to use video rather than fly this fall given the increased cancellation rate. Some businesses have already said that they will continue to hold back their employee travel until airline industry reliability returns.

When you add this reality to the other issues mentioned, it suggests that the largest U.S. airlines are in for a real RASM shocker this fall. The airlines may be looking to Spring 2023 before they can start to see what a new normal looks like for air travel demand. This likely will include a leisure base that isn’t unusually larger than seasonal norms and returns to high price sensitivity, and business travel that levels out at something like 80% of 2019 volumes.

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