Airlines Brace for Turbulence Ahead

US airlines are taking a hit as travelers are holding off their plans due to rising economic and geopolitical uncertainty. Unit revenue – a key metric that measures fare paid across all of the seats an airline has for sale – was flat year over year in the first quarter, falling short of expectations for around 4% growth at the start of the year.

“We started to see a real slowdown in non-US citizen traffic at US airports, given some of the geopolitical uncertainty, or in some cases, just actual travel boycotts,” says Catherine O’Brien, lead US airlines and aircraft lessors analyst in Goldman Sachs Research, on a Research Unplugged podcast on April 15.

Most US airlines have suspended 2025 earnings and revenue guidance as demand has been negatively impacted by less travel by government employees and the negative effect of economic and geopolitical uncertainty, with the latter primarily impacting close-in leisure bookings, writes O’Brien in her research notes. However, US airlines have noticed that the drop in demand, which started in February, has recently stabilized.

O’Brien anticipates this lower level of demand will continue through the rest of 2025. Airlines have been quick to respond to the slowdown by cutting capacity – such as number of routes, flights, and seats available – which may partially offset the lower demand through the second half of the year. Furthermore, fuel prices have come down over the past months, which should provide some relief for the airlines as their outlook becomes increasingly uncertain.

In late March, US Customs and Border Protection data indicated international tourism dropped 13% compared to the same period last year. This is likely due to sentiment around the Trump administration’s policy stance, notes Goldman Sachs Research. However, data from late March represents a recent low point, as May foreign arrivals are now up low single-digits compared to the same time last year. International arrivals are still tracking behind US returnees even after this recovery, up about 7% compared to last year.

Impact of Canadians boycotting US travel

As tensions heighten between the US and Canada following the implementation of tariffs, a sizeable number of Canadians began deferring their US travel plans which will have a noticeable impact on the US tourism industry. Canadians are a top source of international tourism for the US, accounting for 26% of visitors.

By air, Canadian resident return trips from the US have declined by 14% year over year in March, according to Statistics Canada. By automobile, trips fell 32%, implying a 20% decline in trips to the US overall. The US Travel Association estimates that a 27% decline in Canadian travel could mean 2 million fewer visits, or $2.1 billion in lost spending in the US.

Broadly, Goldman Sachs Research economists forecast that a 10% drop in global tourism would slow US GDP growth by a modest 7 basis points (bps), while a 25% fall would slow the economy by 18 bps. This indicates that a pullback from Canadian tourism could create a modest drag on the economy.

Americans are still flying abroad

Despite the pullback from international travelers, about 80% of US airlines’ international flights are purchased by US consumers. US citizen returnee travel was up nearly 7% year over year at the start of May.

“While the airlines have been speaking to domestic demand being softer and have pivoted to solving for load factor versus price to fill planes, the volumes of US citizens traveling have held up better than non-US citizens […] across domestic and international flights,” says O’Brien.

Moreover, it’s worth noting that international flights tend to be booked more in advance than domestic. For instance, one major airline reported that 90% of their transatlantic flights are already booked in April, over 80% in May, and more than 70% in June, well ahead of bookings for domestic flights.

That said, O’Brien believes that should the 20% share from non-US points of sale continue to see pressure, major airlines will likely shift their capacity to domestic flights, similar to the early stages of COVID recovery.

Airline loyalty pays off

The airline industry has made stark changes since 2007, before the 2008/2009 financial crisis. They are now more consolidated with the top four airlines holding around 80% market share compared to 60% in 2007. They have also increased capacity discipline, segmentation, and revenue diversification, which have led the industry to become more profitable and less leveraged, according to Goldman Sachs Research.

A notable driver of revenue is in loyalty revenue – where travelers convert points earned on their credit cards to pay for air tickets like cash. One airline loyalty card partnership saw its annual remuneration (cash from credit card partners for points earned by cardholders that can be used for travel within the year and for future periods) represent 13% of their adjusted revenue in 2024 compared to 4% in 2009.

During past recessions, loyalty revenue has also proven to be more resilient than passenger revenue – one major airline reported loyalty revenue fell just 2% compared to its total revenue declining 19% in 2009.

As airlines brace for more uncertainty this year, Goldman Sachs Research believes the industry overall is in better shape to weather an economic slowdown than it has been in the past.