Canada's Domestic Airline Market Stability Amid US Demand Weakness

As of June 2025, the Canadian airline industry faces a pivotal challenge regarding its domestic market stability in light of softening demand for transborder flights to the United States. This shifting landscape, influenced by recent changes in US trade policy, has prompted Canadian airlines to reevaluate their operational strategies, notably reallocating capacity previously dedicated to US routes back into the domestic sphere.

In a significant shift, Air Canada, the nation's largest airline, reported a decline in bookings for US transborder flights, estimating a drop in point-to-point travel by as much as 13% over the next six months. Despite these challenges, Air Canada remains optimistic about the domestic market, forecasting stable passenger growth in the second and third quarters of 2025. According to Air Canada executives, their diversified network is expected to serve as a buffer against the downturn in US demand. "Our domestic capacity growth will remain in the low single digits, which we believe is sustainable given the current market dynamics," stated a company representative during a recent analysts' meeting.

Porter Airlines, another major player, has also adapted to the changing environment by increasing its focus on domestic travel. CFO Robert Palmer noted that the airline has reallocated a significant portion of its capacity to domestic routes, which now constitute 80% of its network during the busy summer season. This decision reflects a broader trend among Canadians favoring local travel over US destinations, a sentiment echoed by many industry experts.

In contrast, Flair Airlines, an ultra-low-cost carrier, has opted to cap its growth for the year, with CEO Maciej Wilk indicating that the current shift back to domestic routes is not a sustainable long-term solution. "The billion-dollar question remains whether these changes will persist for the next few years or if demand will stabilize," Wilk commented during the CAPA Airline Leader Summit Americas in April 2025. Flair's domestic operations now account for 88% of its departing frequencies, illustrating the growing reliance on local markets.

WestJet Airlines has also made strategic adjustments, suspending several US-bound routes in response to a reported 25% decline in transborder sales. Instead, the airline is strengthening its domestic offerings by launching new routes and increasing frequencies between major Canadian cities. This pivot aims to leverage the growing demand for domestic travel while maintaining connections to WestJet’s European network.

The overall domestic seat capacity in Canada is projected to grow by 7% year-over-year by late July 2025, according to data from the CAPA Centre for Aviation and OAG. This growth is indicative of the airlines' strategies in adapting to the evolving market conditions.

Historically, the Canadian airline industry has relied heavily on the transborder market, which has provided substantial revenue streams. However, the recent geopolitical tensions and trade policy shifts have disrupted this relationship, forcing airlines to reassess their business models. As the summer travel season unfolds, the industry is closely monitoring these shifts to determine whether they signal a temporary adjustment or a more permanent change in consumer behavior.

Looking ahead, all eyes will be on the performance of the domestic market in the second half of 2025. The capacity reallocations and strategies adopted by Canadian airlines in response to diminishing US demand will be crucial to maintaining market stability. While the current sentiment is cautiously optimistic, the airlines collectively await clearer indicators regarding the sustainability of these market dynamics as they prepare for the 2026 travel season.

As Canadian airlines navigate these uncharted waters, the implications of their strategic decisions will not only affect their operational efficiencies but also the broader economic landscape of the aviation sector in Canada. Stakeholders will be keenly observing whether the domestic market can sustain the momentum gained during this transitional phase, or if the anticipated return to normalcy will reshape the industry once again.