Airlines are defying gravity. The global economy is weak and inflation is fuelling a cost of living crisis, yet there is an apparently relentless demand for flying across the world.

Low cost airlines in Europe are touting record booking sprees, US carriers cannot find enough planes to meet demand, and Air India has decided now is the time to place one of the biggest aircraft orders in history. Even Primark has been in on the act, trumpeting strong sales of luggage and beachwear this week.

Adding to the exuberance, passengers are swallowing high ticket prices, helping to drive major airlines back into profit and leading Ryanair boss Michael O’Leary, the poster child of the bargain fare, to declare the era of the ultra-cheap flight is over.

This startling resilience has wrongfooted investors, who sold airline shares in the second half of last year as the economic outlook darkened, safe in the knowledge that carriers have never been completely immune to the rhythms of the wider economy.

The industry’s fortunes are typically closely linked to GDP growth and economic cycles, and for months it has felt like some executives and analysts have been on tenterhooks waiting for the first cracks in demand to appear. Yet there are signs air travel could have more room to grow.

Most obviously, this is not a normal environment. The pandemic has not dented demand for foreign holidays, however pleasant those staycations were. If anything it has increased it. Or as O’Leary put it at the height of the crisis: “Everyone who has been trapped and gone on holiday to Bognor Regis will want to go to Portugal, Italy and Greece.”


Amount MSCI’s global airlines index has risen by since September

Moreover, as analysts at Barclays note, the majority of air travel is undertaken by wealthier travellers anyway, typically people who take multiple trips per year, meaning the industry’s key consumers are insulated from the worst of the cost of living crisis.

Put bluntly: a significant portion of the population, many of whom will have been badly hit by inflation, rarely flew anyway. More than a third of people in the UK did not take a foreign holiday at all in 2019, according to ABTA, the travel association.

In contrast, fortunate higher earners are still sitting on savings built up during the pandemic. Analysts at Morgan Stanley in January calculated US households spent roughly 30 per cent of their $2.7tn “excess savings” in 2022, leaving a considerable buffer against inflation.

For now, these factors powering the pent up demand for leisure travel seem strong. But even if these fade, airlines still have two types of traveller to fall back on.

First, a recovery in business travel is under way, even if some will surely be lost to remote working and heightened corporate environmental concerns. British Airways owner IAG last month said business travel had returned to 70 per cent of pre-pandemic levels, and it is targeting a return to 85 per cent.

And second, some of the most important passengers of all are those flying to visit friends and relatives, typically expats popping home. These byproducts of globalisation can amount to up to 30 per cent of all passengers, and have proven highly resilient.

Taken together with a slightly brightening economic outlook, the industry’s trickiest challenge could be working out how many more planes to fly.

Many low-cost airlines are already above their pre-crisis flying levels, but the big flag carriers have been more circumspect. Capacity for summer in Europe is close to 2019 levels but growing slowly, with year on year growth of 8 per cent for regional trips, according to Barclays.

Several factors have held back capacity globally, notably shortages of staff, planes and spare parts. Repeated bursts of travel disruption have not helped.

These supply constraints have created favourable conditions for airline profits as the surge in demand has allowed airlines to raise ticket prices, according to Brian Pearce, the former chief economist at airline trade body Iata.

But as the supply environment normalises and more planes are available, the breakneck growth in fares can be expected to moderate, pressuring margins.

Airline shares have staged a strong recovery recently, with MSCI’s global airlines index up 27 per cent since September, but still one-third below its pre-pandemic levels. Investors have been burnt before by the industry, and the pandemic reinforced its vulnerability to unexpected shocks.

But for now, there could be further to fly for long-suffering airlines and their share prices.

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