Is the American market cracking as domestic air fares continue to fall?

Richard Maslen December 20, 2016

Travellers in the United States of America (USA) are benefiting from the lowest average airfares in several years, but the discounting is cutting into airline profits and causing them to readdress growth plans due to concerns of an over capacity in the market. Bureau of Transportation Statistics from the office of the assistant secretary for research and technology at the USA Department of Transportation (DOT) show that average domestic air fares in the second quarter fell to their lowest level since Q4 2010 – over 20 quarterly analysis periods ago.

The inflation-adjusted air fare decline to $352.52 for Q2 2016 is outpacing a reduction in fuel costs and resulting in investor concerns over the industry. American Airlines has recently reported third-quarter earnings down 56%, while Southwest Airlines saw its share tumble 12% after it reported lower third-quarter profit and gave a weak forecast for revenue during the rest of the year.

Investors are becoming increasingly concerned low fuel prices are driving some carriers to drop their capacity discipline and pricing power that helped the industry generate a record profit of almost $19 billion last year. But, it is also clear that US airlines are starting to review their network plans in order to maintain yields in the future.

A comparison between the average US domestic air fares charged in Q2 2015 and Q2 2016 clearly highlights the declining yields. The top ten airports in the country have all seen declines of between -8.3% and -16.9% between the two periods with all airports in the Top 30 seeing average air fares decline in the year-on-year period. The best performing airports among them have been Oakland International (-0.7%) and Austin-Bergstrom International (-1.3%), while the largest declines were seen at the nation’s larger facilities, notably Chicago O’Hare International (-16.9%) and Dallas Fort Worth International (-14.8%).

Interestingly, delving deeper into the Bureau of Transportation Statistics data, only two of Top 100 airports in the country by passenger traffic actually reversed the negative trend and showed a small rise in average fares. This was at Birmingham Shuttlesworth International Airport in Alabama (+0.7%) and Akron-Canton Airport in Ohio (+0.4%).

The International Air Transport Association (IATA) expects 7.2 billion passengers to travel in 2035, a near doubling of the 3.8 billion air travellers in 2016. The prediction is based on a 3.7% annual Compound Average Growth Rate (CAGR) noted in the release of the most recent update to the association’s 20-Year Air Passenger Forecast. The US market will be the second-fastest growing in terms of additional passengers per year over the forecast period with 484 million new passengers for a total of 1.1 billion by 2035, a 2.8% growth annually. This stable growth will see it overtaken by China as the largest individual aviation market during the mid-2020s.

US airlines are set to offer 1.3% less capacity in the country this winter, according to current published flight schedules, compared with last year’s winter 2015/2016 inventory. This compares with a 7.4% domestic capacity rise across the last summer schedule, buoyed by growth across all sectors of the industry. Alongside significant growth from American Airlines (due to its merger with US Airways), notable additional capacity was offered by the low-cost carriers including Allegiant Air (+24.8%), Spirit Airlines (+24.1%), Frontier Airlines (+23.1%) and Virgin America (+17.7%) as well as smaller regional carriers Penair (+47.5%) and Island Air (+30.5%).

This winter, it will again be the ultra-low-cost carriers that are showing the largest capacity growth with Allegiant Air growing the fastest by offering a schedule 14.8% larger than last winter. Among the leading operators in the country (offering over one million domestic seats) double-digit growth will also be recorded by Sun Country Airlines (+13.3%) and Frontier Airlines (+12.7%).

This growth is occurring mainly away from the major US airports with just two of the ten largest airports and four of the twenty largest expecting to see a rise in capacity this winter. But, what are the hot markets within the US this winter? Published schedules show that Norman Y. Mineta San José International Airport, Nashville International Airport and Lambert–St. Louis International Airport will all see growth of greater than 7%.

At Lambert–St. Louis International Airport the growth is being driven by capacity growth from Alaska Airlines (+37.8%), GoJet Airlines (+15.3%), its largest operator Southwest Airlines (+13.6%) and Frontier Airlines (+12.3%). Together an additional 235,000 domestic seats will be offered from the airport this winter.

Southwest Airlines is also responsible for the biggest rise in departure seats at Nashville International Airport, where it is also the largest operator. A 2.7% increase in its capacity will deliver almost 50,000 more seats this winter, a similar figure to that also being added by both Frontier Airlines (with flights to Las Vegas, Orlando and Phoenix) and United Airlines, the latter with a new link to San Francisco and more capacity into both Chicago and Newark.

The growth at San José International Airport is being driven by JetBlue Airways which this winter has a new link to Long Beach and an expanded programme into Boston. US majors Delta Air Lines and United Airlines are growing in this market, Alaska Airlines is also increasing its inventory, while public charter provider JetSuite X has new winter flights to Burbank and Carlsbad.

In the international market, revised Air Service Agreements mean Cuba and Mexico are delivering new opportunities to US carriers. The first scheduled flights between the US and Cuba launched this summer and continue through the winter schedule, while open access into Mexico now permits airlines to fly between any points in the countries, removing previous restrictions on capacity and frequency.

Winter schedule data shows that available international capacity from the US is up 0.7% this year versus the winter 2015/2016 season with over 54 million one-way international seats being offered from the country. The arrival of scheduled routes into Cuba has seen that market grow a massive 6,154.1% and become the 20^th largest international market from the US with a similar capacity offering this winter to that being offered to more mature markets such as Colombia and Panama.

Unsurprisingly, Mexico remains the largest foreign market from the US with the liberalisation of the market growing one-way departures from 7.6 million to 7.8 million, a 3.2% percent year-on-year rise for the winter schedule. It is in fact one of only two of the ten largest international markets to see non-stop capacity growth this winter alongside the developing China market, which will see available seats rise 12.3%.

Outside of the top ten markets, which comprise Mexico, Canada, United Kingdom, Germany, Spain, Puerto Rico, China, Dominican Republic, France and the United Arab Emirates, strong growth is being seen in specific transatlantic markets, into the growing Asian market and the Middle East, the latter lead by the continued expansion of the big Gulf hub carriers in the US.

After Cuba, the fastest growing international market among the fifty largest destinations by capacity is Iceland where capacity is up over two thirds due to the expanding transatlantic network of the island nation’s flag carrier Icelandair and the significant long-haul operations of low-cost carrier WOW air. Icelandair provides links this winter between Keflavik International Airport, serving Reykjavik, to ten points in the US, while WOW air is now offering flights to Baltimore, Boston, Los Angeles, Newark and San Francisco. US carrier Delta Air Lines also serves Iceland with flights between New York JFK and Keflavik International.

Qatar has the third largest year-on-year rise in non-stop capacity from the US this winter with available seats up 40.2% including an additional 16,800 Business Class seats. This growth is due to expanded operations from Qatar Airways and a new winter from Atlanta and big increases capacity in the Boston, Dallas and New York markets.

Like Iceland, capacity growth in Sweden is being supported by both legacy and low-cost carriers. Available seats between the US and the Scandinavian nation are up a third this winter (+34.4%) with 38,000 one-way seats extra available out of Los Angeles through a full SAS schedule and a new Norwegian low-cost winter service into the City of Lights.

In New Zealand, the fifth largest growing international market from the US by non-stop capacity, available seats are up 24.4% this winter thanks to growth from the US majors. Since last winter American Airlines has introduced non-stop connection between Los Angeles and Auckland and United Airlines between San Francisco and Auckland. Other leading international markets showing double-digit non-stop capacity growth this winter versus last year comprise Taipei (+21.9%), Republic of Ireland (+15.5%), mainland China (+12.3%) and Haiti (+11.1%).

Growth from major airports in the US this winter is being dominated by the western coast with non-stop international capacity from Los Angeles International Airport up 9.6% and from San Francisco International Airport by 8.8%. Elsewhere Fort Lauderdale Hollywood International Airport is the fastest growing of the 25 largest US international airports this winter with capacity up by 20.3%, while double-digit growth is also being recorded by Seattle-Tacoma International Airport (+13.1%) and Boston Logan International Airport (+10.9%).

The economic situation in Brazil means that is the major destination market has seen the largest decline in winter capacity from the US for the current winter schedule due to the frequency and route cuts from airlines flying between the countries. Overall winter capacity is down 27.1% versus last winter with seven city pair markets being suspended.

Other international markets from the US with at least doubled-digit declines in winter capacity this winter comprise Colombia (-15.8%); Nicaragua (-13.6%), El Salvador (-11.9%), Turkey (-10.9%) and Costa Rica (-10.6%).

Despite some European and US carriers blaming strong currency fluctuations post the UK’s Brexit referendum vote to leave the European Union and the subsequent significant decline in the value of Sterling for cutting flights between the US and the UK, overall transatlantic capacity between the countries is only down 2.5% this winter (due mainly to a British Airways 2.2% capacity cut) and remains the third largest international country market behind Mexico and Canada.

The new US-Mexico air service agreement has allowed low-cost carrier InterJet to significantly expand its activities between the two countries. This winter its available capacity in this market is up 79.4% with service on ten more city pairs compared to the previous winter schedule in 2015/2016. It is the fastest growing of the 50 largest international airlines serving the US market this winter.

The emergence of the low-cost long-haul market between Europe and the US has seen Norwegian boost its offering in and out of the US market by 66.7% this winter, while growing hub transit via the Gulf, particularly supporting traffic flows between the US and the Indian sub-continent is behind a 40.2% capacity growth at Qatar Airways, facilitated by the continued expansion of its long-haul fleet with new Airbus A350 and Boeing 787 equipment.

Interestingly, the three US majors have all reduced their international capacity this winter with one-way non-stop seats out of the country down at American Airlines (-6.0%), United Airlines (-5.4%) and Delta Air Lines (-2.5%) versus last year. The largest capacity decline among the 50 top carriers was from Turkish Airlines (-10.9%) as it has readdressed its winter flying due to economic and political issues in its home market which have resulted in a significant decline in international demand.

The US majors are facing tougher competition from both their home low-fare carriers and some of the strongest and emerging airlines brands from across the world. The recent conflict between them and the big three Middle East hub carriers has only incentivised the likes of Emirates Airlines and Qatar Airways to grow in the US market.

Qatar Airways is among the fastest growing international airlines into the US market this winter, while Emirates has shown it can successfully think outside the box as demonstrated by its choice of Orlando International Airport as its first destination in Florida. The success of this route is already resulting in an upguage of capacity after just a year of operations as Boeing 777-300ERs substitute for smaller 777-200LRs. The airline has also recently revealed Fort Lauderdale as its second destination in Florida, seeing the strong onward network of JetBlue Airways more favourably than serving the busy Miami International Airport.

Fort Lauderdale’s Hollywood International Airport is also one of three new transatlantic destinations that are being added to the British Airways (BA) network in 2017. The airline will launch a four times weekly link from London Gatwick from July 2017 decreasing to three times weekly from September 2017, while a four times weekly link between London Gatwick and Oakland – BA’s first link into California from Gatwick – will commence from the end of March 2017. Both these routes are currently served by low-cost carrier Norwegian and its success is likely to have influenced BA to introduce the competitive operations.

BA will also be introducing a four times weekly link between London Heathrow and Louis Armstrong New Orleans International Airport next year, one of two new transatlantic links from ‘The Big Easy’ (Condor will also operate flights to Frankfurt). The full-service route, described as “a game changer” by New Orleans Mayor Mitch Landrieu will open opportunities for new high-paying visitors, which will diversify tourism within the city. London has been on the airport’s radar for a number of years and the return of BA – they previously served London Gatwick - New Orleans - Mexico City three times weekly with a Lockheed L1011 TriStar in the early 1980s – is a major development for the city.