Have we reached an inflection point in the US airline recovery from the Covid crisis? The latest data show that while bookings remain higher, we slowed down a bit during the last week in March. The question is whether we’ve reached another plateau in what has been an up and down recovery from the pandemic, or whether traffic will begin to improve in April.
Daily US airline passengers had a brief seasonal downturn during the depth of winter in late January and early February, then followed the seasonal recovery pattern in late February and March. As we approach April, we can expect a bit of an uptick before summer traffic really kicks in about Memorial Day. If the downward trend of the last week turns into an inflection point, it may be an indicator of a stalling economy due to inflationary pressures and high fuel costs resulting from the Ukraine conflict.
The following chart with daily US airline passenger screenings by the TSA, shows a leveling off in late March, with last week showing a bit of a downturn. While the downturn isn’t substantial, it also isn’t a continued upward climb. Whether fears of continued inflation, high fuel prices, higher airfares, or the war in Ukraine are weighing on consumer sentiment is a question economists will certainly analyze with respect to the pent-up demand for travel.
On a month-by-month basis, March reached nearly 90% of pre-pandemic traffic levels, with international traffic and business traffic still not returning to earlier levels. The international restrictions that are slowly lifting should improve the situation in North America and Europe, but many Asian countries, including China, remain closed with major quarantines in cities like Shanghai precluding air traffic. While the UK market opening is positive, the Chinese closing is negative. On balance, it appears that we’ve reached a positive inflection point outside of Asia for the international traffic recovery to begin. The following chart shows month-by-month average traffic for the US market through March 31st.
While business traffic levels are returning to about 2/3rds of prior levels, the question seems to be not whether 100% of traffic will return, but how much of the prior level can be achieved? We’ve seen forecasts between 75% and 90%, all dependent on the substitution factor for desktop videoconferencing for in-person meetings. A one in ten drop remains significant, impacting airline yield curves. A 20% drop, which we believe is more likely, with one out of five trips being replaced with video conferencing among people who already know each other well, could change the mix of business to leisure travel permanently, with far-reaching implications.
The problem for airlines is that high-yield international business traffic may not return at the same levels, dramatically impacting flight profitability on key routes and the revenue mix on board the aircraft. With international traffic still stalled in many areas, we may not see the full impact of recovery until 2023 or even 2024.
In the last week, our AirInsight performance index has turned negative for 6 of the 7 days, indicating a weakening market and the potential for an inflection point. We will be watching carefully over the next couple of weeks to determine whether this becomes a trend, fueled by inflationary fears and political instabilities, or reverses back to slow seasonal growth during spring.
The Bottom Line
The climb back from the bottom of pandemic levels has been steady, but the last 10% will be the most difficult to recover. The question now is which direction the recovery will move. Will it continue to slowly close in on pre-pandemic levels, or have we seen an inflection point in which inflationary fears and the war will crimp travel plans? Hold on to your hats, as the recovery could become more volatile than anticipated.
