Pent-up winter travel demand to continue to fuel airline recovery

Airplane's shadow over a crowded beach
Pent-up winter travel demand will continue to fuel the airline industry recovery, a new analyst report says.

Pent-up winter travel demand will continue to fuel the airline industry recovery, a new analyst report says, as Canadians get set to travel to sun destinations despite higher prices and recession concerns.

National Bank Financial analyst Cameron Doerksen wrote in a research note released this week that early signs from airline and tour operators show that winter travel demand is strong, with both bookings and pricing to sun destinations running ahead of pre-pandemic levels.

"Early indications from industry participants point to demand and pricing being strong this winter, despite consumers being pressured by high inflation and concerns over the macroeconomic backdrop," Doerksen wrote.

"With the pandemic now in the rearview mirror, we believe that the pent-up demand will be a significant tailwind for Canadian airlines over the winter, especially in sun destination markets."

Doerksen says the main impediment for sun destination travel over the last two years has been pandemic-related travel restrictions. With nearly all travel curbs removed (proof of vaccination is still required in the United States and in Turks and Caicos) demand is expected to return.

"For many Canadian travellers, what was once an annual sun vacation has been absent for three consecutive winters. We therefore see significant pent-up demand for sun vacations for the winter of 2022-2023," Doerksen noted.

Capacity boom from ULCCs

Airline seat capacity to sun destinations, which National Bank defines as the Caribbean, Mexico, Central America as well as Florida and Hawaii, is up 2.2 per cent for the winter season between Nov. 1 and Apr. 30, compared to the same period between 2018 and 2019. That's in part due to increased competition in the Canadian airline industry, with expanded capacity coming from low-cost carriers including WestJet-owned Swoop and Flair Airlines.

Swoop, which launched in 2018, had slightly fewer than 33,000 seats available to sun destinations in the 2018-2019 winter travel season. That capacity has grown to nearly 200,000 seats, an increase of more than 500 per cent, with significant capacity to Mexico and Jamaica. Capacity at Flair Airlines, which rebranded as an ultra-low-cost carrier in 2019 and did not fly to sun destinations that winter, has grown to more than 100,000 seats for the winter season.

Capacity levels to sun destinations at Canada's two biggest airlines, Air Canada and WestJet, are still slightly below pre-pandemic levels. Air Canada's capacity is down 3.3 per cent compared to 2018-2019, while WestJet's is down 1.7 per cent compared to the same period.

The pent-up demand comes even as several economists predict a recession will hit in the first half of 2023, as soaring inflation and rising interest rates weigh on consumer spending. This week, the Bank of Canada hiked its benchmark interest rate by another 50 basis points, bringing it to 4.25 per cent as it tries to slow the economy down and rein in inflation.

While Doerksen says a significant shift in spending habits could weigh on air travel, particularly for the end of the winter season and trips that have yet to be booked, it should still be a good winter for the airline industry.

"With demand for sun destinations so far at or above 2019 levels with solid pricing and overall industry capacity only modestly higher than winter 2018-19, we are not overly concerned about a potential recession on sun destination performance for Canada's airlines this winter," he wrote.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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