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Airlines are a complex and dynamic industry as capital intensive, long-term assets are coupled with a close-in bookings curve (nearly half of all airline tickets are booked within a month of travel) and largely fixed labor costs. Historically, airline demand has grown at nearly 1.5x real GDP (gross domestic product) with long-term capacity growth of 3% to 4% per year. As a result, airline pricing has been deflationary over time, and investors have a keen focus on tracking this supply/demand relationship. Earlier this year, the domestic airline market was setting up to experience another year of overcapacity in the industry. However, the grounding of the 737-9 MAX aircraft earlier this year following the in-flight loss of a door plug, the inability of a major aircraft manufacturer to produce aircraft on time, and ongoing maintenance issues with the geared turbofan engine have all led to capacity constraints.
This has been setting up memories of 2013-2014, a time period that saw just 1.6% average annual capacity growth and the last time frame when airline stocks meaningfully outperformed the S&P 500 (in 2013-2014 the Dow Jones U.S. Total Market Airlines Index returned 253% compared to the S&P 500’s 44% return). While we are still forecasting 3% to 4% capacity growth later this year through 2025, our estimate is down from earlier in 2024 with a market expectation that there is still further downward pressure given the constraints mentioned earlier. We are tracking these changes weekly in our BofA Seat Tracker reports and recently noted capacity beginning to come out of the short-haul international market (Caribbean, Mexico and Central America) because of these growth constraints.
While capacity is certainly important, demand normalization post-pandemic is equally important. We have characterized 2022 as the year of pent-up domestic travel with 2023 the year of pent-up international travel with demand normalizing in 2024. Our 31st Annual Transportation, Airlines and Industrials Conference in New York on May 14-16 touched on this demand theme. No airline mentioned any change in leisure travel behavior in the last few months despite concerns around the consumer, and transatlantic demand seems stable despite very tough comps. The key takeaway from the conference was that demand trends remain strongest in the premium and corporate segments. Overall, we see a more balanced supply/demand backdrop for the U.S. airline industry as capacity constraints remain and demand trends normalize.
