U.S. dominance of order books could lead to capacity overshoot in 2024

Why it Matters:

The shortage of aircraft is a global phenomenon, but the various regions are finding different effects. The United States, in particular, saw early renewed demand following COVID-19 but also saw robust aircraft orders. As the market continues to oscillate following the pandemic, there comes a point where the airlines will overshoot demand.

Considering both the rate at which capacity is being added to the U.S. system and the disproportionately large number of near-term deliveries arriving, the U.S. is on a trajectory for supply to exceed demand in 2024. 2023 alone is experiencing year-over-year increases in capacity near 20%, with another 15-20% potentially arriving through deliveries in 2024. The timing is essential as a recession in the U.S. is also expected to arrive in 2024, providing further pressure on incoming capacity even as a global narrowbody shortage remains.

Through the push for additional capacity, the U.S. airlines have continued to operate smaller narrowbody aircraft that could be parked to alleviate a potential overshoot. A319, A320, and 737-700 aircraft, in particular, exceed 25 years of age and would represent an obvious target for earlier retirement should the demand landscape turn especially sour.

The Edge:

Airlines rushing to deploy capacity to protect market share are not quick to reverse course. Long identified as a key risk in prior Aircraft Intelligence Monthly editions, the demand overshoot is most likely to begin in 2024, but 2025 is expected to be a financially strained year.

Even as the speed of traffic increase or decrease lags at the speed of consumer behavior, fares do not. We expect 2022 to have witnessed the peak in fares for the U.S., quickly degrading in 2024 and into 2025. However, traffic remains constrained, an apparent contradiction that will keep traffic levels high while fares drop as more capacity arrives by way of larger aircraft into fewer cities.

There is little threat of major airline failures, even in a sharp reversal in demand; however, the dynamic is expected to change quickly. The ripple effect across other economies could bring caution to aircraft purchasing; however, we still believe the global system will remain undersupplied through 2027, even if the U.S. overshoots.