Airlines survived 2020, but as flyers return their dollars won’t

As 2020 draws to a close, TAC Analysis reflects on the economic chaos wrought by COVID-19 on capacity, traffic (and most importantly) revenue.

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Release Date
December 29, 2020
Airlines survived 2020, but as flyers return their dollars won't
  • Traffic recovery continues to outperform expectations, peaking near 50% of 2019 numbers.
  • Counterintuitively, as passenger traffic returns, yields are anticipated to further drop, putting pressure on 2021 revenues.
  • As the traffic recovery and revenue recovery diverge, the return of passengers is no longer translating into revenues.

Into the final month of 2020 and the tenth since the declaration of the global pandemic, air travel in the United States continues to defiantly outperform expectations. Even as infections and deaths find their new peaks, so too does air travel.

This robust return to the skies has been a surprise to many in the U.S. who were expecting a slower recovery. Set aside the should, people are traveling — and doing so in greater and greater numbers. Air travel has shown a largely  unexpected resilience, even outperforming the TAC Analysis forecast published early fall, built to take into account the coming positive inflection points. With the decision tree forecast originally regarded as optimistic, it anticipated a December dip below 30% of 2019 numbers, a dip which has only vaguely materialized into a plateau near 36% with a Christmas spike nearing 50%.

Now that an industry can begin to observe how the traveling public behaves over time and with the promise of a vaccine available far earlier than expected, cautious optimism is en vogue. Yet within TAC Analysis, this optimism is tempered by the trends in fare data only now coming into focus.

Related: As coronavirus pummels air travel, lessons from 9/11 on what may come next

Traffic remains comparatively robust, and the recovery is expected to continue through 2021 at or above expectations. However, as originally noted in the traffic forecast, passenger traffic does not necessarily translate to revenues, the defining factor being the fares paid. While lower fares were not unexpected during a global downturn, what is new is that the fares may not yet have bottomed, long beyond the trough of passenger traffic.

This uncoupling creates a premature sense of optimism as the anemic revenues reported during the prior two quarters included the steep traffic declines to which the industry has become accustomed, but not yet the industry-wide reductions in fares. Contrary to the rules of economics 101, increased demand is, in fact, resulting in a decrease in fares, requiring distinctions be made between the traffic recovery and the revenue recovery for the airlines.

The U.S. industry’s fares are beginning to react to the renewed demand in ways contrary to expectations, and with deep impacts on the industry’s passenger revenues into the next year. While the industry’s forecasts are adjusted to reflect the new recovery in traffic, we are focusing our attention to the fare story, the early stages of which are just now beginning to materialize. This is the biggest challenge facing the economics of the industry heading into 2021, and beyond.

Related: Breaking the statistical link between COVID-19 cases and air travel demand

Together with the improved visibility to the coming traffic recovery, we apply the trending fares to provide the first indication of U.S. passenger revenues through 2021. The story is mixed. While traffic continues to recover ahead of schedule, fares have begun to fall, further disconnecting the traffic recovery from the revenue. A good story for the cost-conscious traveler, this new indication is a sign for airlines that the willingness of the passenger to return to the skies is not accompanied by their willingness to pay a premium for it.

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