US: Overseas visitor arrivals have fallen

The recent tariff announcements have had ripple effects across the travel industry. Overseas visitor arrivals to the U.S. fell by 11.6% in March, according to data from the federal government’s National Travel and Tourism Office. The domestic travel market has also taken a hit due to a decrease in government-related flight bookings. In response, several U.S. airlines have reduced their earnings forecasts, and stocks have corrected accordingly.

Despite the gloomy outlook, U.S. airlines look well-placed to weather the storm — if history is anything to go by. “Airline stocks traditionally lose 40% of their value over six months leading into recession before doubling from there. And airline revenue typically reverses 14 points at the trough, then recovers from there,” said Jamie Baker, U.S. Airline and Aircraft Leasing equity analyst at J.P. Morgan.

As it stands, U.S. airlines are still in fairly good financial shape, with liquidity generally exceeding both Global Financial Crisis (GFC) and pre-COVID levels. “In addition, while our market call near term has turned more bearish, we do expect overshooting to the downside, as we think the market fails to appreciate the flexibility larger airlines have to raise capital and avoid the restructuring fate so commonplace in prior downturns,” Baker noted.

However, this potential recession may prove anything but typical. For starters, there’s never been a downturn where legacy airlines entered from a position of relative strength, with low-cost carriers already struggling with profitability. Plus, the industry today is less dependent on corporate demand and more so on the premium category, marking a reversal from previous slowdowns.

“Overall, we’re not suggesting an economic slowdown would be a cakewalk for the industry — particularly not for franchises that were already struggling with profitability before fundamentals turned south. We’re simply pointing out that equities have been behaving the way we’d ordinarily expect heading into a downturn. On the other hand, COVID taught us consumers and businesses could live without air travel for extended periods of time if forced to,” Baker said. “Nevertheless, we believe industry fundamentals favor a comparatively benign impact for the profitable airlines.”

Europe: Airlines are not yet pricing in a full-blown recession 

In the same vein, European airline stocks declined dramatically on the back of tariff concerns, although they have recovered over the past few weeks. However, the sector remains very volatile in relation to the news flow on changes to passenger demand.

“Only one month ago, European airlines were talking very positively on the demand outlook for this year, which has now become highly uncertain,” said Harry Gowers, the lead analyst for European Airlines at J.P. Morgan, as recession risks looked to be increasing in April.

Looking ahead, transatlantic demand will likely soften to some extent in the coming months. “In our view, it’s inevitable that transatlantic travel sees some demand impact either from European leisure points of sale (POS) as Europeans holiday elsewhere, from U.S. leisure POS due to consumer uncertainty, or from lower corporate bookings due to cost-cutting and waning business confidence,” Gowers noted. However, U.S. inbound passengers from Western Europe rebounded in April after a steep decline in March, suggesting that while numbers are still down on a two-month basis, demand for European travel to the U.S. has not materially weakened, with some impact from the later timing of Easter this year. On the other hand, short-haul demand continues to look solid into the summer, and Ryanair recently reported a positive demand outlook.  

Overall, European airlines are not currently pricing in a full-blown recession scenario, which would likely lead to considerably greater share price downside if it were to materialize. And there are reasons to be optimistic about the resilience of the sector. European airlines today are more diversified compared with during the GFC, while profitability levels are higher and balance sheets are stronger. In addition, fuel prices are significantly lower, as oil prices have fallen recently.

“The one unknown is that leisure makes up a much higher proportion of premium demand versus 2008/2009. With a post-pandemic boom in premium-leisure trips, there is therefore little precedent for how the post-pandemic premium travel customer may react in this environment,” Gowers added. So far however, demand for premium remains strong, according to European legacy carriers — more so than for economy.

Asia: Travel activity remains largely robust

Demand for air travel has been resilient in China, which recorded 11.2 million air passengers during the Golden Week (national holiday) period — marking an 11.8% increase year over year. International flights also recovered to around 85% of pre-pandemic levels, indicating a strong rebound in global travel activity.

However, some challenges remain. For starters, Chinese airlines face pressure from soft ticket prices, which continue to weigh on profitability. In particular, international fares decreased by over 10% year over year, reflecting competitive pricing strategies as flight capacity ramps up.

“In addition, the sector remains vulnerable to unresolved geopolitical tensions that could affect long-term growth. These tensions could impact international relations and travel policies, potentially influencing tourist flows and the overall attractiveness of China as a destination,” said Karen Li, head of Asia Infrastructure, Industrial and Transport Research at J.P. Morgan.

In India, airlines are benefiting from robust supply-demand dynamics, which should persist for the next four to six quarters. “Industry consolidation as well as supply tightness should keep load factors elevated in the high 80s. However, in the near term, we need to be cognizant of the short-term demand disruption due to the recent geopolitical conflict,” said Amyn Pirani, who covers Indian Automobiles, Auto Parts and Transportation at J.P. Morgan. “Crude prices have started to ease, and this should offset any demand/cost headwinds that have come up recently.”