OPINION: The post-COVID travel boom is running out of steam

European beaches and cities are jam-packed with U.S. tourists eager to venture across the Atlantic now that there are no COVID-19 restrictions to hold them back. But back at home, the air travel recovery appears tapped out.

Alaska Air Group Inc. on Tuesday forecast weaker-than-expected sales growth for the third quarter. Chief Financial Officer Shane Tackett told Bloomberg News that travelers’ prioritization of international sojourns is coming at the expense of its primarily domestic routes and is weighing on fares. Meanwhile, Southwest Airlines Co. in June ran a promotion for 40% off fares on trips between Aug. 15 and Dec. 14, with the week of Thanksgiving blacked out. Frontier Airlines last week had a sale for $29 fares on select days of the week through Nov. 15. Spirit Airlines Inc. offered one-way flights for $50 from Aug. 9 through Oct. 4 excluding Friday and Sunday bookings.

Airlines typically run sales when they’re trying to stimulate demand for weaker booking periods, so these promotions don’t bode well for the fall. For the better part of the last 18 months, airlines have had more demand than the country’s aviation infrastructure could handle. There are still logjams in the airplane manufacturing supply chain that are keeping carriers from taking delivery of the jets they’ve ordered, and other structural capacity constraints, particularly at the busiest airports, are limiting the number of flights they can operate daily. But that balance may be shifting.

While the U.S. consumer has proved much more resilient than many economists and investors had anticipated, credit card charge-offs are on the rise, the savings that this group built up during the pandemic are almost depleted and there are signs that inflation is starting to influence spending decisions. Pool Corp., a distributor of pool equipment and supplies, cut its full-year guidance last week and said some customers are deferring discretionary purchases such as heaters or upgraded cleaners. Trips were a worthwhile splurge for many people after pandemic restrictions took long-distance vacations off the table temporarily, but there can’t be much left in the “revenge travel” phenomenon at this point as consumers take stock of their finances. Average booked rates at Omni Hotels & Resorts properties — which are primarily domestic — have moderated because vacation travelers aren’t splurging on fancier accommodations as frequently, Chairman Peter Strebel said in a June interview. Like the airlines, the company is relying more on promotions this year to attract leisure travelers than it had to last year, he said.

First-quarter earnings at U.S. airlines were broadly disappointing amid lackluster business demand and a shift in traditional booking patterns that made the already seasonally weak months of January and February even weaker. The risk is that the pattern repeats once the summer boom in travel has run its course. The corporate traffic recovery is stuck at about 25% below pre-COVID levels at most airlines; if anything, bookings seem more likely to downshift in the near term as businesses cut costs. The total operating costs of companies rated investment grade by S&P Global Ratings declined 5.3% in the first quarter, indicating companies reduced day-to-day expenses such as wages and business travel, according to a report this month from S&P Global Market Intelligence.

[As revenues and profits soar, have Alaska Air’s fares peaked?]

Domestic unit revenue at Delta Air Lines Inc. declined 1% in the second quarter relative to the period a year earlier, while domestic passenger revenue for each seat flown a mile slid 2.4% at United Airlines Holdings Inc.; sales on the same basis at American Airlines Group Inc. fell 3%. American said total unit revenue may fall as much as 6.5% in the current quarter, worse than analysts had anticipated. The guidance for the second half of the year “seems to show pressure in the domestic market, offset by continued international strength,” TD Cowen analyst Helane Becker wrote in a report.

The average price in June for a U.S. round-trip ticket booked through travel agencies was $555, down about 8% from the period a year earlier, according to data from Airlines Reporting Corp. That’s the third consecutive month that fares have declined relative to 2022 levels. Fares are still about 8% above 2019 levels, and continued system constraints provide some kind of floor on pricing.

But the airplane deficit in the U.S. isn’t nearly as drastic as it is overseas. Domestic seating capacity has actually recovered to 2019 levels, although it remains about 16 points below where the market would have been if growth hadn’t been disrupted by the pandemic, according to an analysis by Melius Research analyst Conor Cunningham. In the international market, a larger number of airlines went bankrupt, with low-cost, long-haul carriers — including SAS AB and Norwegian Air Shuttle ASA — hit particularly hard. During the depths of COVID, the idea of packing people on twin-aisle jets for overseas jaunts seemed like a relic and those wide body planes were put into retirement at a much higher clip than their narrow body brethren that are more popular for domestic routes. The result is a 39 percentage point deficit in international aircraft supply relative to what is needed to support demand, Cunningham’s analysis shows.

Delta executives have said travel patterns indicate the international summer vacation season is extending well into October in the wake of the pandemic, particularly in the warmer, southern parts of the continent. One look at the heat domes in Europe this month might explain why autumn sounds appealing to some travelers. The extended international travel season will help counterbalance any shortfall in domestic markets for Delta and United, which also has a substantial overseas business. But the durability of other post-pandemic travel habits that have helped airlines make up for slower corporate traffic — such as leisure travelers springing for premium seats and taking advantage of work-from-home policies to book more long-weekend trips — is untested in an economic downturn.

Even in Europe, where it seems just about everyone is vacationing this summer, some cracks are emerging in the demand picture. Ryanair Holdings PLC said this week that it might need to offer lower fares in October and November to stimulate demand for seating capacity that’s expected to be 25% above pre-pandemic levels this winter. “We have noticed in the recent couple of weeks a slight softening in the close-in fares in late June and early July; nothing that I would be overly worried about at the moment,” Ryanair Chief Executive Officer Michael O’Leary said on a call to discuss the company’s quarterly results. But there’s “a degree of customer resistance to the higher fares.” Whereas last year customers were paying prices well ahead of Ryanair’s budgeted expectations to lock in seats for summer vacations, now “there is a kind of a leveling out,” albeit at an elevated fare relative to 2022, he said.

Leveling out is probably the best way to describe what’s happening in the air travel markets. The airlines aren’t headed back to the pandemic doldrums. But stocks of the largest carriers have taken off like jet planes in recent weeks, bouncing back from a slump after the regional banking crisis sparked fears of a recessionary pullback in consumer spending. Shares of Alaska, for example, hit their highest price in more than a year earlier this month. United shares last week touched a more than two-year high. Investors may have stopped worrying about air travel demand a bit too soon.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. A former mergers and acquisitions reporter for Bloomberg News, she writes the Industrial Strength newsletter.

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