Trans-Atlantic Airfares Are High, But Will Drop This Fall

Travel between the U.S. and Europe has long been a rich source for both business and leisure travel. Even before airplanes, ships regularly crossed the Atlantic with loads of passengers, and no wi-fi of course. Many have tried, and many have failed, to offer higher quality but lower price alternatives, and the North Atlantic is littered with airline names like Norwegian, WOW, EOS, MaxJet and SilverAir.

This summer, transatlantic travel is strong and fares are very high – record high levels according to Sktyra, an Airbus-owned company that tracks airfares among other airline data. This matches what the U.S. airlines are seeing for domestic travel. Some are calling this “revenge travel”, but that name is unfortunate, as it suggests anger, hate, or vengeance. Better names would be “pent-up travel”, or “latent demand”, suggesting that the demand has been there all along but not able to be realized due to government restrictions, limited airline flights, and risks of getting stuck a long way from home. Consumers shouldn’t be worried if the current high fares price them out of the market, though. That’s because most trends suggest these fares will fall by about the middle of August.

No Testing Required

Early in June, the U.S. dropped what had been a requirement to show a negative Covid test before boarding a flight to the U.S. This regulation had contributed to weak transatlantic airline demand. Even though summer European travel tends to book long before June, it caught up quickly once the testing went away. Delta Airlines, the first U.S airline to report it’s second quarter earnings, spoke encouragingly of their transatlantic opportunity in the third quarter.

This is not surprising. Many travel sites featured stories of people stuck in quarantine, at their personal expense, because they had failed a test before their flight home. It didn’t take hearing many of these stories for families to decide not to fly internationally until that risk went away. Business were also cautious and stuck to using video for most transatlantic business.

Limited Capacity

One of the biggest U.S. airline stories all year has been reliability, or the lack of it. Airlines have been caught with limited staffing, and it has taken time to coordinate selling schedules with operational realities. JetBlue Airways (I serve on their Board of Directors) trimmed their schedule back in April, at first looking like their problems were unique. But it didn’t take long for the rest of the industry to follow suit, and in May and June almost every U.S. airline announced a trimming of their summer capacity due to staffing limitations.

While transatlantic flights didn’t get cut as much as domestic, in part this is because many point-to-point flights had already been suspended during the pandemic, so there was less to trim at the start. The largest U.S. airlines kept flights on the largest trunk routes shared with alliance partners, and travelers going to mid-size or smaller cities had to connect when they might have a had a nonstop option in 2019. In addition, reduced domestic flying made connecting travel more limited.

This combination of strong demand and limited capacity has created high fares for transatlantic travel, just as U.S. airlines have seen domestically. But against this business-friendly backdrop, there are some dark clouds as the industry moves into the fall.

Business Travel Not Returning In Full

Pre-pandemic, summer vacation travel would wrap up starting in mid-August. Larger U.S. airlines would then see a pickup in business traffic, meaning smaller volumes but higher average fares. October and early November have traditionally been a popular time for trade shows and conventions, consistent with this pattern. For transatlantic airline economics, this is even more important since larger, wide-body airplanes are more dependent on a high fare paying class of customers to make the high capital and high fuel cost equipment viable.

At the recent Delta Airlines earnings call, they spoke encouragingly about the return of business travel while also quoting numbers that, by volume, are still 70%-80% of 2019 levels. This same airline has spoken positively about a “premium leisure’’ customer emerging, one who will pay more than the lowest fare for nicer airport or onboard treatment. The relevance of this is because if all business travel does not return, some airlines won’t need to replace it with only the most price sensitive travelers.

With fewer business travelers this fall, transatlantic flights will have more seats to fill. This on its own means lower fares, and this doubles down when considering the seasonality that has fewer vacation travelers available.

Restructuring Of European And Middle East Carriers

European airlines are competitors, or sometimes partners, with larger U.S. airlines. The pandemic was of course a worldwide event. Other governments took differing views on lockdowns, who could enter and more. Also, many European and Middle East carriers have no or very small domestic markets, making them much more dependent on long-haul travel. Emirates is the extreme of of this, having no domestic markets being based in Dubai, and only two aircraft types: the Airbus A380, the biggest commercial plane in the world, and the Boeing 777, another big wide-body airplane. My son calls this plane Emirate’s regional jet, even though each holds between 350 and 428 seats. Smaller airlines like TAP Air Portugal have restructured out of court, while Scandinavia’s SAS Airlines recently filed for Chapter 11 bankruptcy restructuring.

None of the European and Middle Carriers sat still over the last two years. Like airlines around the world, they used the pandemic to make fleet changes, re-think their product and costs, and hunkered down to be ready for as return of travel. Some did better than others, but thinking that they won’t be strong competitors for U.S. airlines is a mistake. A seat is a seat when it comes to airline capacity that creates pricing pressure to fill. The alliances among U.S. and European and Middle Eastern carriers also creates interesting “frenemies”.

Growth Of Lower-Cost Airlines

I said earlier that the transatlantic skies are littered with names of failed airlines. Two things make some of the newer opportunities more likely. One is the emergence of longer-flying, single aisle aircraft like the Airbus A321-XLR. The other is when the airline has strong non-transatlantic business and adds this flying to extend the network. This has happened in both the U.S. and Europe.

Narrow-body aircraft inherently have a lower risk profile than wide-body equipment. They are lower cost to acquire and operate, and can deal with seasonality issues better as a result. They also have domestic or shorter-range uses when markets get weak, something the larger wide-bodies can’t offer. This gives them a disruptive aspect that is hard to react to as a large, global airline. Yet, the growth of this equipment on the transatlantic will put pressure on airfares and this will start in a bigger way in Fall 2022.

A famous Yogi Berra-ism about restaurants was “no one goes there anymore – it’s too crowded.” This is the situation of summer 2022 transatlantic flying. Truly open for the first time since March 2020, many places create exciting travel opportunities for families who have stayed close to home over the last few years. This, combined with constrained capacity has created very high fares. For anyone who can plan their travel for this fall or Spring 2023, they likely will find many more low-price options available.