The end of the COVID travel recovery in the US is fast approaching, as it has been since March 2020. Despite numerous forecasts predicting robust growth, we have received calls criticizing our predictions as naive and overly optimistic. However, the warnings that the recovery will eventually stall out have proven true. The signs that the recovery is complete will be marked by a drop in fares, rather than a drop in traffic. This is because the industry has become capacity-constrained, with multiple players competing to deploy capacity.
In 2022, demand existed without sufficient seats to accommodate it, leading to revenue management departments realigning demand to capacity. The industry's primary metric for recovery shifted from traffic to revenues, with ticket revenues approaching the long-term trend. However, this shift has enabled higher costs, which will be short-lived. As capacity slowly returns to match supply with demand, rapidly falling fares will be the first indication of the final leg of the recovery. Load factors are expected to remain high as revenue management teams offer high fares today to fill seats of sufficient capacity tomorrow.
Despite the coming problem of fare softness amid strong traffic, the airlines still have room to grow through 2023, with international growth across the Pacific remaining to be harvested. However, the pilot shortage and supply constraints are still limiting capacity growth, even in the recovery-leading domestic market. By 2024, an early peak in fares is anticipated, from which traffic will continue to increase at pre-pandemic levels but at decreasing fares. The years 2025 and 2026 could be the start of a challenging era for the airlines as delayed deliveries arrive simultaneously with lower-paying passengers. Therefore, it is essential to lock in those massive labor contracts before the regret sets in.