When will the thirst for travel born from the pandemic be quenched?

21 June, 2023

Behind the declarations of numerous airlines that demand remains quite strong, one glaring question remains - when will the thirst for travel born from the pandemic be quenched?

No definitive answer is emerging as airline executives try to determine the shape demand will take later in 2023 and beyond. Work-from-home trends continue to evolve, given that more businesses are mandating more time in the office for employees.

But consensus is building that some shifts in work patterns are permanent. Outside forces creating constraints in the airline industry - supply chain bottlenecks and infrastructure challenges - show no signs of improving in the near future.

The only certainty that currently exists is that the narrative could change as time passes, and as more clear-cut patterns materialise.

Airlines across the Americas ponder when the demand bubble will burst

After numerous interviews at the recent International Air Transport Association (IATA) Annual General Meeting (AGM) in Istanbul, Türkiye with senior airline officials across the Americas, a new analysis report from CAPA - Centre for Aviation highlights that is becoming increasingly rare to find a member of any airline's management team who is not bullish on the near-term demand outlook.

This is particularly evident at North American airlines operating on the trans Atlantic routes during the northern summer high season in the Northern Hemisphere. Management at Delta Air Lines has said that its 2023 summer schedule in the trans Atlantic is the largest in its history.

Avianca CEO Adrian Neuhauser told CAPA TV that the outperformance in the company's network is stemming from flights to North America and Europe. Avianca is working with some wet lease operators to increase capacity to Europe for the summer period - "and that's working well," he stated.

Avianca CEO Adrian Neuhauser at the IATA AGM

Demand in the domestic US market remains solid; but year-over-year comparisons are challenging, given that many international markets in the northern summer of 2022 remained closed off, which fuelled historical levels of demand in the market.

Southwest Airlines, which remains largely a US domestic operator, recently said that demand remained strong.

The latest data from IATA show that US domestic traffic in Apr-2023 was 3% higher than in 2019, and up 5.5% year-over-year.

Is revenge travel spurred by the pandemic waning?

Even as demand holds steady in the US market, it is yet to be shown that pricing traction in the US will hold.

Data from the US Bureau of Labor Statistics show air fares in the US for May-2023 fell approximately 13% year-over-year. For the first three months of 2023 fares remained above 2022 levels, and in Apr-2023 dropped approximately 1% year-over-year.

Of course, that's just a brief snapshot, and doesn't paint the full picture, but it is only logical that pricing leverage would decrease as post-pandemic demand starts to temper off. A recent article in the New York Times stated that revenge travel spurred by the COVID-19 pandemic appears to be slowing.

The article quoted Omar Sharif, the founder of Inflation Insights, who stated that he did not expect hotels and domestic air travel to experience the same surge in summer 2023 as in the year prior: "We're just not getting the same kind of pop any longer," he said. "Airfares have pretty much stalled out", he told the publication.

The US Travel Association has released its biannual forecast for travel to and within the US through 2026: "Robust domestic leisure travel demand has been the driving force in the overall industry's post-pandemic comeback", said the association's president and CEO Geoff Freeman.

"Though the surge we experienced in the last year is starting to moderate, we expect this segment to remain resilient in coming quarters."

It is still too early to determine whether some changes in travel will be permanent

Airlines elsewhere are also wondering if current strong demand patterns will hold.

WestJet Group CEO Alexis von Hoensbroech told CAPA TV during the IATA AGM that there has been pent-up demand in the market across all segments. In talking with his colleagues at the meeting, he said: "I think everyone is pretty positive as far as this year is concerned".

But the big question, said Mr von Hoensbroech, is how long the demand will last, and "will a recession kick in sooner or later?"

WestJet CEO Alexis von Hoensbroech at the IATA AGM

Southwest CEO Robert Jordan told investors in early Jun-2023 that [the airline's] visibility is somewhat limited, simply because the booking curve for airlines is relatively short…So when I say demand is strong and what we can see is very strong, that period is roughly in the 60- to 90-day time frame."

Mr Neuhauser of Avianca also stated that, "We all want to know how much of this is a bubble and how of this is sustainable." He explained that there had been obviously changes in consumer behaviour driven by remote work, some of which could be permanent.

It does appear that more companies are requiring that employees return to the office on a more regular basis, as hybrid models become more of the norm. That will affect travel and demand patterns, but it could be some time before travel suppliers, including airlines, can determine distinct and permanent trends.

Airlines continue to work around stubborn supply chain and infrastructure challenges

There are also constraints affecting airline operations, from supply chain bottlenecks and airspace challenges.

Industry frustration with aircraft delivery delays and engine reliability issues was palpable at the IATA AGM.

"The inability of the OEMs [original equipment manufacturers] to deliver aircraft on time, that's a serious issue," Air Lease Executive Chairman of the Board Steven Udvar-Házy told CAPA TV during the event.

Air Lease Corporation Executive Chairman of the Board Steven Udvar-Házy at the IATA AGM

Uncertainty in delivery streams continues to affect how airlines approach network planning.

Copa Airlines is adding three new destinations from its hub at Panama City Tocumen International airport to Manta, Ecuador; Austin, Texas; and Baltimore Washington International airport. Those flights are making their debuts from the end of Jun-2023 to early Jul-2023.

The airline usually adds new routes in the middle and end of the year, but at the moment Copa has no planned additions for the end of 2023: "That's a constant conversation we're having based on the number of aircraft we're able to fly by the end of the year," Copa Chief Commercial Officer Dennis Cary told CAPA TV at the IATA AGM.

Copa Airlines Chief Commercial Officer Dennis Cary at the IATA AGM

Airlines are working to obtain aircraft from the leasing market or extend existing aircraft lease agreements to fill the gaps created by delivery delays - and the general consensus is that improvements will not start to emerge until 2025.

Mr Udvar-Hazy has said that the Airbus A321XLR "is about a year-and-a-half behind schedule, so that really has an impact on our customers and our own capital allocation."

CAPA's sister publication Aviation Week has reported that delivery of Air Canada's Airbus A321XLRs has been pushed out to 2025, and the airline has tapped the leasing market for interim lift.

In some regions the supply chain bottlenecks are compounded by constraints on airspace.

In the US, airlines are working with the FAA to reduce congestion in the New York's region airspace during the summer season by operating larger aircraft and reducing their schedules.

During a recent Air Transport World Window Seat podcast, Airlines For America CEO Nick Calio said airlines had been attempting to make the schedules comply with what is in fact going to be the reality for the summer in the Northern Hemisphere, "...which is a shortage of [air traffic] controllers, and as we all know, summer weather".

Airlines for America CEO Nick Calio at the IATA AGM

Source: CAPA TV

"We need more people staffed for each flight because people are travelling different now and its a different kind of flying," he explained to CAPA TV during an interview at the IATA AGM.

It remains challenging for airlines to make assumptions about the future

Supply chain issues and air traffic controller staffing challenges will not be resolved in the near term, which means that delivery delays and infrastructure challenges will constrain capacity at some airlines for the foreseeable future.

In some ways that could be a boon for yields and ultimately revenues - but it is likely safe to say that operators would like to see those issues resolved sooner rather than later.

The reality is that airlines likely cannot make any concrete assumptions on their operations or demand going forward until delivery streams and travel patterns stabilise.