US airlines have had a busy summer, not without some operational disruptions. This wine has also had surprisingly high prices, partly in line with the inflation that consumers are seeing in all products. The industry typically has high price elasticity, meaning that higher fares normally mean fewer people traveling. But demand this summer was high even with high rates. Most US airlines made money in the second quarter, and so some are thinking 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 changed color yet, but it’s fall for American airlines. Airlines measure revenue not just in absolute terms, but on a per-unit basis. The most common is “RASM”, or revenue per 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 varies. America’s largest airlines are facing lower RASM, which means revenue weakness this fall, due to five specific realities:

Fewer leisure travelers

As summer travel winds down, so does the rush of leisure travelers. But it’s more than just a normal seasonal slump, as this summer featured what some have called a “revenge trip.” The idea here is that after two summers where many stayed at home, or close to home, this summer had an unusual one. a large amount of travelers ready to take to the sky. The fact that high tariffs did not dampen demand supports this view.

The industry will have a better picture of what may be a normal demand for leisure that may occur 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 get together with family even when they weren’t ready to be around many strangers. So the “revenge” aspect of the summer leisure rush likely won’t be repeated when the usually family-oriented demand comes with the end-of-year holidays.

Price sensitivity returns

Airlines are often used in economy 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 simply stealing share from others. Airlines have seen customers switch destinations when fares in one country 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.

There was a pause in this elasticity 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 of leisure prices maintaining summer highs is very low, so airlines will need to cut fares to attract what volume may still exist in this lean seasonal period. Fewer leisure travelers, each paying less, puts a lot of pressure on the revenue per unit metric.

Business travelers will not fill the entire void

The major US airlines made the fall work, because while leisure travel always declined at the end of summer, business travelers filled the gap until the holidays. Business travelers did not generate the volume of the leisure base, but paid three to five times more for their tickets. This means industry load factors will drop slightly and airlines will fly slightly less and use this time for necessary aircraft maintenance and crew rest.

Along with reporting lower volumes on higher fares, major US airlines each reported business travel at 70%-80% of 2019 volumes. As well as the leisure base, some airlines reported revenue higher business with even higher than normal rates for this group. A big revenue issue for the biggest US airlines is how much of the revenue gap business travelers will fill this fall. The pre-pandemic focus on trade shows and conventions in this period suggests that fall 2022 travel will not be as large as trade show volumes have not yet returned to 2019 levels. Other things hindering business travel, including increased comfort with video services and businesses focusing on sustainability, will also affect business travel this fall. The bottom line is that business travelers cannot be counted on in the same way as in 2019 to operate in the fall, which means that airlines must either fly even less or accept lower RASM for flights that choose to perform.

Weaker US Dollar Limits International Travel

US airlines got a big international boost in June when the US stopped requiring a negative Covid test before boarding a flight to the US. The change was followed by a surge in international flight bookings and saw airlines rushing to they added trips. This makes sense, since the risk of getting stuck, at their cost, for a week or so was reason enough not to fly internationally. Some have predicted 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, they are hit by a falling US dollar, which makes these trips more expensive for US travelers. Everything that American travelers would buy, including their hotel and food, is more expensive because of this. While travel can now happen without major Covid risk, travel is much more expensive. Price sensitivity returning to domestic travel may also affect international travel, and so the major US airlines that provide most of this travel cannot expect that domestic weakness can be offset by international strength.

Operational withdrawals causing some travelers to wait until spring 2023

On top of 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 pulled back their fall schedules in an effort 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 dangerous for businesses, who may choose to use video instead of flying this fall given the increased cancellation rate. Some businesses have already said they will continue to hamper travel for their employees until the airline industry is restored.

When you add this reality to the other issues mentioned, it suggests that the largest US airlines are in for a real RASM shock 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 is likely to include a leisure base that is not significantly larger than seasonal rates and returns to high price sensitivity, and business travel accounting for around 80% of 2019 volumes.

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