As capacity growth to sun destinations moderates from the post-pandemic travel boom, vacationers could potentially face higher fares this winter. But pricing will still depend on the health of the Canadian consumer.
Last year, Canadian airlines aggressively ramped up capacity to sun destinations in the wake of the post-pandemic travel boom, leading to more deals for consumers and downward pressure on yields for airlines.
But this year, that capacity growth has decelerated, National Bank analyst Cameron Doerksen wrote in a research report about the winter travel demand outlook for Canadian airlines. The sun destination market – namely the Caribbean, Mexico, Central America and U.S. destinations of Florida and Hawaii – is one of the most competitive for Canadian airlines, and according to Doerksen, the most significant driver of profitability is industry capacity.
Overall capacity to Mexico, the Caribbean and Central America is set to decline slightly by 0.3 per cent compared to last year. Air Canada’s (AC.TO) capacity will increase 5.7 per cent compared to the 2023 season, while WestJet and Sunwing will see capacity fall by 1.4 per cent and 7.4 per cent, respectively. (While Sunwing is owned by WestJet, WestJet pushed back its planned integration of the airline to 2025.) Flair Airlines remains the lone ultra-low-cost carrier flying to sun destinations, with Lynx and Canada Jetlines winding down operations this year, and its capacity will be down 6.2 per cent. Transat’s (TRZ.TO) capacity will be up 0.7 per cent.
As Doerksen wrote in his report, higher capacity typically leads to lower prices for consumers, so a pullback in capacity growth would result in higher fares. But softening consumer demand may force airlines to offer discounted fares. Doerksen highlights that several airlines have recently been offering promotions on winter vacation packages “in an attempt to spur early booking activity.”
“Although not unusual for airlines to offer these early season sales heading into the winter (noting that most of the promotions were only available to book until the end of October), it is worth keeping an eye on any future activity as it may be a sign that demand is softening,” Doerksen wrote.
“However, with interest rates in Canada expected to continue declining through the remainder of the year, consumer confidence may improve, which could be positive for vacation demand in 2025. Combined with a more rational capacity growth environment, pricing may strengthen relative to last winter as the season progresses.”
As capacity growth moderates, Doerksen believes Air Canada stands to benefit and the winter travel season could be a positive catalyst for the airline’s stock.