As the post-pandemic travel surge wanes, airlines are beginning to cut ticket prices in a bid to fill surplus capacity.
The two-year ârevenge travelâ boom, fuelled by pent-up demand after pandemic lockdowns, has come to an end, with airlines facing a more uncertain outlook. While carriers like Ryanair and Emirates reported record profits last year, driven by strong passenger demand and high ticket prices, the industry is now experiencing a shift.
Ryanair, Europe's largest airline by passenger numbers, sent shockwaves through the aviation sector on Monday with a warning of "materially lower" airfares during the summer months, following a 15 per cent year-on-year fall in spring fares.
Chief executive Michael OâLeary attributed this to weaker-than-expected consumer spending and passenger resistance to recent price hikes.
Many carriers have been forced to lower ticket prices in recent months, a stark contrast to the period of high fare increases following the end of pandemic restrictions. During this time, passengers were eager to travel and the industry grappled with a shortage of aircraft.
"Customers are going back to basics," said Güliz Ãztürk, chief executive of Turkish airline Pegasus, at the Farnborough Air Show this week. Ãztürk suggested the industry should prepare for a period of "normalisation" as the "revenge travel" phenomenon unwinds.
Air India chief executive Campbell Wilson agreed that demand patterns were "always going to normalise" following the "egregious imbalance between supply and demand post-Covid".
While some airlines, such as easyJet, are reporting strong results and stable ticket prices for the summer, Ryanair's dominance of the European market â it operates roughly twice the number of flights as easyJet â has analysts concerned that its heavy discounting will force other short-haul airlines to follow suit.
Analysts at Bernstein noted that the gap in performance between Europe's two largest point-to-point airlines is "unusual".
Ryanair's warning follows a similar announcement from Lufthansa, which expects to struggle to break even this year due to pressure on yields, a measure of average ticket prices.
North American airlines have also been reducing prices to fill their planes after overcapacity in the domestic market. Air Canada cut its profit guidance on Tuesday, citing a "lower yield environment," while US budget carrier Spirit Airlines warned of "significant pressure" on yields continuing into the third quarter.
Larger carriers are also affected, although executives expect the oversupply of seats to ease by the end of August. Andrew Nocella, chief commercial officer of United Airlines, stated that while demand is strong, "capacity growth was just so significant that it pressured yield."
Ryanair's results sparked a sell-off in European airline shares on Monday, the first day of the Farnborough International Airshow, although a partial recovery followed easyJet's earnings announcement on Wednesday.
Despite the recent downturn, many airline bosses at Farnborough expressed confidence in absorbing any impact to fares and suggested the demand wobbles have not been widespread.
Virgin Atlantic chief executive Shai Weiss reported strong demand on the carrier's transatlantic routes, particularly in premium cabins and from US customers. However, he acknowledged "a bit of weakness in the third quarter, in consumers out of the United Kingdom," citing the cost of living crisis, uncertainty, and the change in government.
Luis Gallego, chief executive of British Airways owner IAG, stated that even on highly competitive European routes where yields have softened, they remain above pre-pandemic levels.
The cracks in the market are primarily observed in the short-haul European and US markets, and in economy class. Longer trips and more expensive business or first-class flights have been less affected. Airlines remain optimistic that demand for travel remains strong enough to sustain earnings and keep airfares well above 2019 levels.
Christian Scherer, chief executive of Airbus' commercial aircraft division, acknowledged "some signs of declining yields" but stressed that it is "too early to say whether this is a slowdown, whether itâs anecdotal or structural".
One executive pointed to the recent cooling in UK inflation and wage growth as signs the industry is mirroring a broader economic picture as the era of high inflation comes to an end.
The travel boom of the past two years has driven airlines to order a record number of new aircraft, creating a substantial backlog. This has raised concerns that the market could be flooded with new planes just as travel demand wanes.
However, Tufan Erginbilgiç, chief executive of Rolls-Royce, played down these concerns, predicting that supply chain issues will persist for at least another two years.
Erginbilgiç stressed that the industry's fundamentals remain positive, with strong passenger growth expected. While acknowledging the competitive nature of the airline industry, he remains confident about the future.
"I am not awake at night [worrying] about growth in this industry."
Additional reporting by Patrick Mathurin