America’s love affair with flying is growing faster than the economy

Americans love to fly and it shows.

U.S. airlines carried a record 889 million passengers in 2018, a 20 percent increase from five years earlier, according to Bureau of Transportation Statistics records that date to 2002. That wanderlust appeared in U.S. airlines’ robust second-quarter revenues and executives across the industry said they’re seeing continued strong consumer demand throughout the peak summer travel period.

What’s most intriguing about this ardor for air travel, however, isn’t full planes at the peak of summer travel season, but that the planes have remained full even as U.S. airlines add new flights, larger planes and more seats.

“It’s the persistence of this [demand] that’s been interesting,” said Jamie Baker, a JP Morgan analyst who has tracked airlines for 17 years. The boom poses a big question for the industry, especially amid trade wars and worries about whether a recession looms: “Is this just a flash in the pan?” Baker said.

The airlines’ traffic surge has outpaced the nation’s economic expansion over the same period. Current airline demand is roughly twice the rate of U.S. growth. Historically, that figure “has been closer to 1.5 times,” said Rajeev Lalwani, a Morgan Stanley aerospace analyst.

Airline stocks, however, have been a flop for investors. An index of five U.S. carriers is up 9% this year, compared with 17% for the S&P 500. Only Delta Air Lines Inc.’s 19% return is currently outperforming the index. The carriers have also underperformed the S&P index three of the past four years and merely matched its return in 2016.

The demand trends suggest the world’s largest aviation market remains a growth business, and possibly not a mature industrial sector yoked firmly to economic performance.

“Years ago, we used to model air travel based on the growth of the economy,” Delta Chief Executive Officer Ed Bastian said in a July interview. “That relationship broke several years ago. And I think the internet has played a big contributing part in that.”

Consumer demand drove Delta to a quarterly revenue record of $12.5 billion, with half of its top 10 record sales days occurring in the 30 days prior to its July 11 report, Delta executives said. The world’s largest airline, American Airlines Group Inc., said its $12 billion second-quarter sales was a record for the period.

“I think the fundamental demand for this product in this business is very, very strong and we’re capitalizing on it,” Bastian told analysts. Delta and United Airlines Holdings Inc. have both raised their profit forecasts for 2019.

Airline executives and analysts point to a variety of sources for the demand. Some of the primary factors:

Cheaper flights

Average domestic airfares have declined more than 15% since early 2015 when adjusted for inflation, to $353 per round trip in the first quarter this year, according to government data. Airlines are capitalizing on sophisticated revenue management systems which predict demand with more far more accuracy than in the past. Seats that once flew empty are now more likely to be priced for sale, and filled.

Budget airlines

The overall supply of budget fares has grown. Spirit Airlines Inc. and Allegiant Travel Co. have expanded dramatically in the past decade, with the most growth at ultra low-cost airlines. The Big Three legacy carriers have responded with “basic economy” fares as part of a broader shift to segment airplane cabins into more zones based on price and amenities. “That has been a pretty big shift in our business and we’re encouraging a new set of travelers to fly,” said Andrew Nocella, United’s chief commercial officer.

Experiences vs things

The millennial tendency to value experiences over material goods is fueling some of the demand for air travel, Bastian and others said. Older people have bucket lists; younger ones see traveling with friends as more important than buying some expensive possession. Today’s travelers want to “get that Instagram shot on top of Kilimanjaro or wherever and airlines are absolutely going to help you accomplish that,” Baker said.

Loyalty scheme changes

Airlines have seeded some of this demand by making major changes to loyalty programs. The carriers are focused on turning frequent-flier miles into a transactional “currency” for members to spend for things beyond award trips, such as upgrades, bag fees, cocktails in airport lounges and TSA PreCheck enrollment costs. The airlines have also begun to dynamically price award trips, raising and lowering the number of miles needed based on demand. With miles gaining “better utility” travelers have become eager to collect more of them from travel and credit card spending, Nocella said. Justin Bachman, Bloomberg