The end of the U.S. COVID travel recovery is coming.
Of course, that’s been logically true ever since March 2020. We’ve been continually reminded of it every month since our first forecast of robust growth. The number of emails and calls we receive calling our forecasts naive and optimistic continues to this day.
But those calls came in 2020, and again in 2021 and 2022. 2023 is trending the same direction.
We were first warned of “pent-up demand” in June 2020. Traffic is now nine times what it was at the time.
Last spring, our forecast was singled out in industry forums for not recognizing the pent-up demand overextending the recovery. Ticket revenues have nearly doubled since.
But, in the end, they weren’t wrong. At least, not technically. The recovery will eventually stall out. The remaining potential energy will be filled with active travel, and the record years of re-growth will end.
But, what will the end of the recovery look like?
What will be the signs that the pandemic recovery is complete and the market will no longer be perpetually pulled up by the disconnect that was COVID-19? Rather than repeat the obvious that the recovery will inevitably end, we’ve been running scenarios of how it will end. The scenarios are all remarkably close.
Watch fares. Watch them closely.
A drop in traffic will not accompany the peak of the COVID recovery but rather a noticeable drop in fares. Such is the case in a capacity-constrained market with multiple players all rushing to deploy capacity.
In 2022, travel demand existed without sufficient seats to accommodate. The result was an industry of revenue management departments doing what they do best, realigning demand to capacity.
The primary metric of recovery for the industry shifted from traffic to revenues. And those ticket revenues are getting close to the long-term trend (sans any inflation adjustments, which is another newsletter for another day).
For the U.S. airlines, the final leg of the recovery will be especially profound. Costs have recently ballooned with new labor contracts, large order books, and expensive financing requirements. But it is the rationale of a new reality of high fares that has enabled the higher costs – a reality that will be short-lived.
As pilots are hired, airplanes delivered, and capacity slowly returns to match supply with demand, rapidly falling fares will be the first indication. However, this time, load factors are expected to remain high as the same revenue management teams offering high fares today look to fill the seats of sufficient capacity tomorrow. All while capacity continues to slowly but surely, outpace demand growth.
It is this fare softness amid strong traffic that looms as the U.S. airlines’ coming problem. The market has sufficient room to grow traffic but not room necessary to deal with markedly lower fares.
The airlines still have room to grow through 2023, aligning with airline expectations. However, our expectations begin to diverge in 2024 when we anticipate an early peak in fares, from which traffic will continue to increase at pre-pandemic levels but at decreasing fares. 2025 and 2026 could be the start of a challenging era for the airlines as delayed deliveries arrive simultaneously with lower-paying passengers.
But not quite yet.
International growth remains to be harvested through 2023, particularly across the Pacific. The pilot shortage and supply constraints are still the limiter of capacity growth, even in the recovery-leading domestic market.
Put another way: there remains sufficient time to lock in those massive labor contracts before the regret sets in.