Headwinds ahead: constrained capacity in the US, softer prices for European airline

In its airline industry outlook, JP Morgan said the aviation industry could face several headwinds in the coming months despite a robust summer demand for air travel. For instance, US carriers are contending with capacity constraints, with domestic capacity growth expected to be only around 3.5% in the second half of the year. However, transatlantic travel remains strong with European destinations still seeing strong demand from US travellers, further bolstered by a strong US dollar. ""Our prevailing thesis is that premium and international demand for air travel remain in the lead,"" said JP Morgan US airline and aircraft leasing equity analyst Jamie Baker. Across the pond, European airline stocks had fallen recently due to investor concerns around lower airfares. ""The froth that was built up from the early bullish comments about summer pricing has unwound, leaving a high degree of uncertainty about the state of underlying demand amongst investors,"" said JP Morgan lead analyst for European airlines and travel retail Harry Gowers. It remarked how Ryanair said at the start of the year that peak summer fares could be 5%-10% higher over the previous year, however it now looks more likely to be either flat or up to a 5% increase. Gowers observed: ""Peak summer short-haul pricing growth of +3–5% would be indicative of a normalising but healthy environment, rather than a demand problem, and a solid result off the back of capacity growth and two very strong summers."" However, if pricing turns negative, it may be indicative of a demand problem relative to supply. JP Morgan said airlines had noted consumer resistance to higher airfares during fourth quarter earnings calls. It added that pricing for the second quarter of 2024 could prove softer than expected for network carriers due to capacity growth, a mixed demand backdrop and the impact of discounting by low-cost carrier. As for China, its native consumers are continuing to holiday within their own boundaries, far outpacing 2019 levels. However, international flights are only 75% of pre-pandemic levels. ""Chinese airlines are gaining notable market share, while foreign airlines have been slow to add flights to China,"" said JP Morgan head of Hong Kong equity research and head of Asia infrastructure, industrial & transport research Karen Li. However, it does expect international demand from Chinese consumers to pick up in the coming months.