The Changing Face of U.S. Airline Demand

When Taylor Swift sings her song “Cruel Summer,” she’s most certainly not referring to European airlines. IAG, Air France-KLM, and TAP Air Portugal all reported spectacular third-quarter financial results, powered by scorching-hot transatlantic demand, and strong intercontinental demand more generally. Shorthaul flying within Europe was hardly a drag either – Air France-KLM’s Transavia and especially IAG’s Vueling performed exceptionally well (Vueling’s operating margin was 26%!). Success was only somewhat less striking in the Nordic region, where Finnair and the Icelandic startup Play each recorded 12% operating margins. Nothing cruel about their summers.

Across the Atlantic, more U.S. airlines reported third-quarter results, providing a clearer picture of demand trends. Domestic markets, importantly, started softening in August as schools reopened. That’s especially true for leisure markets like Florida and Las Vegas, which experienced extreme strength last fall. Currently, it’s overseas markets that are shining. Even those U.S. airlines enjoying an intercontinental and premium boom, however, aren’t matching the margins they earned in 2019. One big reason: higher labor costs. Demand overall, to be clear, remains solid, even domestically.

In China, economic growth isn’t what it used to be. But one area holding up well is domestic travel, allowing the country’s Big Three airlines to earn solid summer profits. Air China, China Eastern, and China Southern all delivered operating margins of between 10% and 11%.

One reason why China isn’t growing so fast anymore is that some of its manufacturing jobs are moving to Mexico. The resulting economic boost there helped Viva Aerobus produce an outstanding third-quarter operating margin of 20%. Economic growth didn’t help rival Volaris nearly as much though. Its operating margin was just 5%. Expects lots of additional airline earnings reports this week.

Looking back at other developments from last week, longtime Qatar Airways chief Akbar Al Baker is stepping aside. JetBlue announced new European routes. Southwest and Turkish Airlines are adding more Boeing narrowbodies. And Lufthansa has yet another new airline brand.