Buoyed by low fuel costs and steady demand, the global airline industry recorded a solid start to the year before a slowdown in travel to the US clouded the outlook.
In the first quarter of 2025, global revenue gains outpaced gross domestic product (GDP) growth, capacity rose, and carriers saw a positive operating margin.
However, shadows began gathering as the quarter progressed. Several large economies face an increased risk of recession, and the US recorded a small contraction in the first quarter. Growth has declined steadily for carriers in recent months and international travel to the United States has decreased compared to the same period last year.
In our latest report, “Airline Economic Analysis” — now issued quarterly with a broader, global perspective, we report on the industry's performance in the first quarter of 2025, delve deeper into the potential impact of the US slowdown, and highlight four key trends shaping the industry.
Higher revenue growth and margin preservation are driven by cheaper fuel
With global GDP rising 2.9% and favorable spending and income trends, the airline industry saw a positive first quarter. Carriers increased global capacity by 3.5%, achieved 4.1% revenue growth, and generated an operating margin of 2.3%, which was slightly lower than the same quarter in the previous year.
Declining fuel costs — average cost per gallon of jet fuel dropped 20% and is close to $2 per gallon — moderated rising expenditures in other categories. Worldwide, operating costs increased by 1.8% (CASM), and unit revenue (RASM) increased by 1.1%.
The four regions that our report examines saw varying results. Latin American carriers led their peers with operating margins of 15.6%, continuing last year’s trend. In the Asia/Pacific region, margins stood at 6.2%. North American carriers saw an increase of 0.5% points to 0.7%, and European carriers posted negative margins, albeit a slight improvement year-over-year.
FSC and LCC profitability varies by region as North American LCCs struggle
In Latin America, both business model groups produced industry-leading operating margins. Unlike the fourth quarter of 2024, value and low-cost carriers (LCCs) increased capacity at nearly double the rate of full-service carriers (FSCs).
Despite reporting better fundamentals in the first quarter, LCCs in North America continue to struggle. The group reported an operating margin of -3%. For FSCs, margin remained flat at 1.5%.
Both FSCs and value/LCCs in Europe increased their capacity and revenue substantially during the first quarter; however, their operating margins ranged from 4.2% for LCCs to a 10% margin loss for FSCs. Underlying economics improved for the FSC group (RASM +4.1%, CASM +1.4%), but not enough to return to profitability.
Airline industry faces new normal as US demand evolves
Premiumization and international travel trends have been key forces shaping the industry’s “new normal,” and carriers must now monitor how they might be affected by shifts in US demand.
Demand for leisure travel jumped after the pandemic, as remote work became more common, Generation Z and millennials began traveling more, and Americans with disposable income prioritized spending on travel. Full-service carriers have been offering higher-yielding products to capture consumers’ willingness to spend more on travel, and the trend toward premiumization is expected to continue.
However, the slowdown in US travel demand might prompt FSCs to adjust their offerings amid uncertainty. Value and low-cost carriers, which will be more squeezed by a slowing economy, might shift further toward adding higher-cost options.
The recent weakness in international demand has primarily been driven by inbound visitors to the US, while US point-of-origin travel has continued to grow. While this raises potential concerns, foreign point-of-origin revenue accounts for only 12% of total US carrier revenue. If demand among US citizens for international travel remains strong, carriers will not be overly exposed to declining demand from offshore markets.
Four big airline trends that will shake up global competition
Revenue quality is king. Leisure-oriented demand for premium travel experiences appears to be here to stay. On the other hand, a portion of meeting demand for ultra-low fares is not sustainable in today’s cost structure. Driving yield or add-on revenue to compensate for overall cost increases will require winning more premium-oriented customers.
Business model convergence continues. With the rise of premiumization and changes to cost structures, carriers will continue to “meet in the middle.” Full-service carriers have successfully added “no frills” seating zones to their aircraft, for example. Lower-cost carriers continue to strive to appear friendly and value-oriented to attract upmarket customers.
The value carrier shakeout is not over. For value/LCCs, the equilibrium between supply and demand has been elusive. A portion of lower-cost capacity may be eliminated or repurposed to serve premium customers. Businesses will continue to evolve toward more hybrid or value-oriented models, and some might see consolidation or retrenchment.
The duality of international travel. US carriers may see only a modest impact of economic uncertainty if travelers continue to spend. Outside the US, carriers may see more choppiness as international travel to the US slows. However, US carriers could be impacted if others do not adjust their capacity commensurate with demand from their domestic point of sale.
As these four trends emerge, airlines must adapt quickly to remain competitive. Premiumization presents new revenue opportunities, but rising costs and shifting demand necessitate ongoing recalibration of strategies. The evolving balance between full-service and low-cost models will reshape competition while international travel dynamics add further complexity. Carriers that can align business models with changing traveler expectations and market realities will be best positioned to thrive in an increasingly dynamic and challenging global airline industry.
