Domestic travel demand is starting to normalize

Southwest Airlines reported Q3 earnings yesterday. And while revenue increased ~5% year over year, the company’s net income dropped ~30%.

The cause? In large part, a classic case of supply outpacing demand. Airlines have added flight capacity this year while consumers have returned to more traditional bookings, traveling during peak vacation periods or holidays. And more capacity + less travelers = lower fares and lower margins.

• Case in point: Southwest’s unit revenue – passenger revenue per seat (empty or full) flown one mile – is expected to drop between 9%–11% year-over-year in the fourth quarter, while its capacity is up about 21%.

This problem is also plaguing other domestically focused budget airlines. Spirit Airlines reported quarterly results yesterday, saying they’ve been losing pricing power and cutting fares to fill seats. Frontier is running into the same issue.

Which brings us to a silver lining: discounts are dominating heading into the holidays. Data from online travel agency Hopper shows average domestic round-trip flights for this Thanksgiving are down 14% from last year, and fares for the Christmas travel season are 12% lower than a year ago.