Strong U.S. Airline First-Half 2024 Macro Demand Belied Pricing Weakness

Apparent strong demand in the U.S. domestic airline market in the first half of 2024 was in the “eye of the beholder,” with many routes proving unprofitable despite high numbers of passengers reported at U.S. airports, Airlines for America (A4A) Chief Economist John Heimlich said.

The U.S. Transportation Security Administration (TSA) regularly broke records for daily passengers screened at airports throughout the summer, including screening more than 3 million total passengers in a single day for the first time on July 7. But persistently low fares have caused U.S. carriers to rapidly remove capacity from the domestic market, a process that started late in the summer and is expected to continue through at least early next year, according to U.S. airline executives speaking on recent earnings calls.

ULCC Frontier Airlines CEO Barry Biffle said Oct. 30 that there is “a long way” to go before carriers halt reducing domestic capacity.

“This summer there were so many places where there was so much excess capacity and so much reliance on stimulated traffic,” Heimlich told Aviation Week. Many routes were operated with “low fares which were too low for airlines’ recent cost structures,” he added.

“Whatever is on sale for this weekend, if I were selling it at $2 I could have a lot more demand than I have at $400,” Heimlich explained. “Excess capacity is really unprofitable capacity. So oversupply means the fares aren't adequate to cover costs. Demand is a bit fungible in general. Yes, there's enough macro demand and people want to travel. But for the purposes of the airlines serving the marketplace, it really needs to be a function of both price and volume to warrant the service.”

The cost/revenue imbalance can be seen in American Airlines’ third-quarter results. The carrier reported that its operating costs for the nine months ended Sept. 30 were up 4.6% year-over-year, more than doubling a 2.1% year-over-year rise in revenue over the same period. The carrier incurred a $149 million third-quarter net loss, and its nine-month net profit of $256 million was down 68.1% from the same period in 2023.

Maintenance Penalty

Heimlich noted that a knock-on effect of delayed engine and aircraft deliveries is higher maintenance costs. In addition to higher labor costs, these are pressing carriers’ profit margins.

“Airlines are holding on to older equipment longer, and there's a maintenance penalty,” he said. “There's an organic maintenance backlog because the MRO world itself is stretched for labor and parts and materials, and they've gotten very expensive. Also, the cost of ownership and leasing aircraft is quite high because demand is outpacing supply because of the production issues.”

Heimlich said the recent hurricanes that hit the U.S. southeast continue to affect the domestic airline market, outlasting the immediate flight cancellations caused by the severe weather. “It has a residual effect," he explained. "Because unless someone is substituting where to go, they say, 'Well, maybe I'm not going to go to a hurricane-devastated area right now. Or if I live in one of those areas, maybe I'm going to stay put and work on my house. I'm not going to be doing a lot of travel.' So, there are effects at origin and destination, even in the aftermath.”