Solid macro fundamentals combined with capacity pressure created by the Boeing 737 MAX grounding have set US airlines up for a strong summer season, analysts at Cowen & Co. project.

"With moderate capacity growth and strong demand trends, the airlines are seeing improved pricing heading into the peak travel season,” Cowen wrote in a recent research note. US airlines bolstered their positions with a $5 one-way increase in early May that was started by Dallas/Fort Worth-based American Airlines and matched across the board. 

“The increase in fares reflects the airlines’ confidence in demand,” Cowen wrote. “The biggest surprise about the most recent fare increase was that it was matched across the board by all airlines. We believe there is some concern among airlines that fuel costs are rising and ticket prices weren’t rising, so it was good to see this increase. It is even better that the increase is holding. Transcon fares are still competitive, but most other fares have increased,” Cowen added. North American jet fuel prices are up about 4.5% compared to a month-ago figures, but are down 4.3% year-over-year, IATA figures show.

The US market’s May fare bump comes on the heels of strong April fare data reported by ARC Corp. Fares in April were up 5.2%, while the domestic portion of the market increased 6.8%. 

“The April increase was welcome and showed meaningful acceleration over year-to-date trends,” Cowen said. Systemwide fares were up 2.8% through the first four months of the year, ARC calculates.

The mid-March grounding of the 737 MAX has forced the model’s 50 operators to re-work schedules and cancel trips. US domestic capacity will not grow as much as forecast as a result. American, Dallas-based Southwest Airlines and Chicago-based United Airlines operate a combined 72 of the 370 MAXs that were in service when regulators grounded the model. Airlines don’t expect to have the aircraft back before August at the earliest and have adjusted their schedules accordingly. Cowen projects domestic capacity increasing 3.4% this quarter, 4.4% in the third quarter, and 6% in the fourth quarter. Those figures are down by as much as 1.5% from projections before the MAX groundings.

“We expect continued strength in fares during the peak travel season as corporate demand remains strong and leisure is picking up,” Cowen said.

One notable watch item that could slow positive demand momentum: US industrial production declined in three of the first four months in 2019, including an 0.5% dip in April, US Federal Reserve figures show. Cowen said the trend is “concerning, as industrial production tends to be a good barometer for corporate travel.”

Sean Broderick,