CAPA: US airline market faces critical two weeks ahead

Featured Analysis

The world’s second largest aviation market, the USA, could be close to another turning point as COVID-19 cases spike across the country. The reopening of US state economies and lifting of stay at home orders had driven a slight uptick in air travel demand and airlines added more near-term capacity than expected, offering low fares to encourage travel.

But COVID-19 cases have recently surged, placing the outlook under even more uncertainty. Experiences in other domestic markets suggest that surges in cases provoke a slowing of capacity growth.

New CAPA modelling projects domestic US seat capacity to be down by 60% year-on-year by the middle of August - the summer peak - and down by almost half of last year’s level of capacity by Thanksgiving in November - but even this level of production could be hampered by the rampant spread of the virus in the US.

US airline capacity at a turning point with resurgent COVID cases

As US COVID cases spike again in most US states, there is a threat that the upwards trajectory of capacity and passenger traffic may be arrested.

CAPA's domestic capacity projections for other countries suggest useful extrapolations can be made of domestic airline capacity behaviour from observation of those countries which emerged relatively early from the worst of the corona virus.

One common feature throughout is that capacity is leading demand by a large margin, although China domestic has been operating at near 75% passenger load factors over recent weeks.

More importantly, there is a tendency towards an inverse relationship between the number of newly detected COVID cases and the amount of new capacity being added in the market, with, understandably, a slight time lag. 

That is, when COVID-19 cases spike, capacity (along with passenger demand) tends to decrease.

See for example: CAPA: close to full recovery in domestic China airline capacity by end-2020

This inverse relationship is the result mainly of two things: (1) passenger willingness to fly and (2) government-imposed restrictions, like border closures or quarantine restrictions, as infection spikes. Other influences (on the upside) include government-subsidised and/or directed services on certain routes.

The US model below shows 2020 airline capacity (dark blue shade - domestic; light blue - international) falling sharply below 2019 levels (gold line) in Mar-2020 as the initial spike in COVID-19 cases (red line) occurred.

The supply-demand gap widened in the past week to 3-Jul-2020

The light green line in the graph below indicates total daily passenger throughput via US Transportation Security Administration (TSA) checkpoints since the TSA started issuing daily updates in early Mar-2020.

The gap between the green line and the actual capacity shows that, since early Mar-2020, there has been a large gap between supply (seat capacity) and demand (passengers); that gap narrowed in early Jun-2020, but has since widened, as airlines added extra capacity for the Independence Day weekend. 

Now, as cases again surge (see the renewed spike in the red line) in what Anthony Fauci, the US government's top infectious diseases expert on 2-Jul-2020 called "a very disturbing week", US airlines could once again be forced to cut their capacity levels, if underlying demand evaporates as a consequence.

In this vein, IATA's Chief Economist, Brian Pearce reported on 2-Jul-2020 that “There was a dip in bookings in the second half of June, as coronavirus cases picked up... This is causing us to be rather cautious about prospects in the next few months.”

CAPA’s USA Air Capacity Model projections: domestic and international seats, 2020. Cases surge; will capacity slow?

CAPA will continuously update its model for the US capacity outlook and provide regular updates via www.centreforaviation.com.

The outlook beyond Independence Day is highly uncertain

CAPA Chairman Emeritus, Peter Harbison, said: “The outlook for US airline capacity beyond the summer peak is highly uncertain. If COVID-19 cases continue to surge as they have over the past week (to 3-Jul-2020), the beginnings of the recovery could fade away. The introduction of more quarantine measures could also dampen key north-south leisure markets. For example, travellers returning home to the states of New York, New Jersey, Connecticut from their Florida holidays must undergo 14 days' quarantine.

"Business travel in the US is expected to remain suppressed for the foreseeable future as corporations maintain their travel bans into 2021. Some businesses are achieving productivity and efficiency benefits from streaming services, which could impact how corporations manage their travel in the near future. During this period, travel may only be necessary to “close the deal”, rather than engage in face-to-face negotiations. 

"Aside from repatriation/VFR and cargo services, there are not many drivers for the US international air market right now.

"International travel to/from the US will simply not recover until the spread of the virus abates and global coordination improves in terms of what passengers can expect in terms of measures to safeguard their health on the travel journey.

"The next two weeks will be a critical period for US airline recovery"

"As a consequence, US airline revenues will remain depressed for the foreseeable future. That dire scenario is forcing US airlines to amass huge levels of debt to cover continuing high cash burn. Excluding aid from the US federal government, the country’s airlines are collectively pushing the amount of debt they have raised in 2020 to nearly USD50 billion. Given what is now happening on the health front, the next two weeks will be a critical period for US airline recovery", said Mr Harbison.

The details are contained in CAPA’s new USA Air Capacity Model, which provides a breakdown of the nation’s domestic and international outlook for seat capacity powered by OAG – as well as each city and route pair – based on the 2019 actuals.

Combined with government statements, airline network announcements and capacity projections, the model provides a robust and granular guide for future air capacity projection. Using assumptions around 6 key phases – Zero/Grounded, Skeleton, Acutely Restricted, Basic, Restrained and Standard – users can track the pace of recovery in their relevant market.

About CAPA’s ‘Air Capacity Model’

CAPA’s new ‘Air Capacity Model’ has been developed to provide the aviation and travel industry with a robust guide to future air capacity possibilities anchored in:

  • Baselines based on aircraft configuration data in the CAPA Fleet database and supported by OAG schedules;
  • Decisions and announcements by the US government on travel restrictions and border announcements;
  • Assessments by CAPA, based on real time reports from CAPA’s unique daily news system, which collects over 300 stories every day:
    • Airline statements, route plans and pricing;
    • The public’s willingness and propensity to fly;
    • The introduction of standard criteria on sanitary conditions onboard aircraft and at airports;
    • ‘Right-sizing’ of aircraft to match demand.
  • The airline capacity projections are updated in real time, as major new events occur (made possible using CAPA's unique daily news gathering capability).

The CAPA ‘Air Capacity Model’ is available by 12-month subscription, providing a monthly excel file* with Input (assumptions) and Output tabs.

The Output tab offers a total market graphic, as well as airport and route data summary tables.

Live demonstrations of the new model are available on request by completing your details here or contacting membership@centreforaviation.com

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