US airlines are poised to raise ticket prices further as Americans shrug off the fastest rise in domestic airfares in decades in their resolve to travel.
Airfares rose 18.6 percent in April from the previous month, the largest one-month increase in the history of the Consumer’s price indexaccording to the US Bureau of Labor Statistics. They were one of the biggest contributors to the 8.3 percent rise in the CPI last month.
On an annual basis, the Airline Fare Index rose 33.3%, the largest annual increase since 1980, although prices were still low at the same point in 2021 due to the Covid-19 pandemic.
“We expect customers to tolerate [increasing prices] for a long time,” said Jeffrey Goh, CEO of Star Alliance, the global airline consortium that includes United Airlines and Lufthansa. But “the industry is neither deaf nor blind to know that the cost of living and rising inflation [are] a risk in terms of the recovery of the industry”.
Demand is outstripping seat supply, allowing carriers to pass on high fuel and labor costs to customers. Travel spending is rising across the board with the fastest acceleration in airfares, so the booking momentum should continue, said Michelle Meyer, chief US economist at the Mastercard Institute of Economics.
Strong wage growth and rising savings mean consumers “can tolerate price increases for longer, especially for a type of spending they are prioritizing,” he added. There is also no sign that the current increase in Covid-19 fares has reduced airfare spending as it had in previous waves.
Amid robust pent-up travel demand, US airlines have remained optimistic about summer travel and its overall recovery. Although inflationary pressures on consumers.
“Demand is stronger than ever,” American Airlines Chief Executive Robert Isom said during an April earnings call. American, United and Delta Air Lines, the three largest US carriers, are expecting profitable second quarters, with United forecasting record quarterly revenue.
United did not sell seats for discounted summer travel in advance, Chief Commercial Officer Andrew Nocella said at an industry conference in March. “We saved the seats and are now selling them at much higher yields, so we’re very happy with that.”
The average price across all U.S. airlines for a domestic ticket booked a week before travel was $208 on May 9, down from $188 on May 2, but down from $214 on May 11. April, according to US bank Raymond James.
Meanwhile, US airlines fly 7 percent fewer seats in the second quarter than during the same period in 2019, according to Raymond James analyst Savanthi Syth.
“There is always a [price] ceiling because at some level there will be demand destruction,” said Helane Becker, an analyst at Cowen, but “we don’t see demand destruction anytime soon.”
Becker forecast that prices would rise 7 percent a month through at least June and that Americans will be able to tolerate increases until after the summer. “We worry about September [and] October bookings.
“Fuel, which accounts for 25 to 40 percent of airline costs, is nearly 80 percent higher,” he said. The three big US airlines, which do not cover fuel, have reported success in passing the cost on to passengers.
Airlines’ labor costs have also risen as they raise wages to attract and retain workers. Flight plans have been further affected by a lack of planes: American cut its schedule after continued delays to the Boeing 787 Dreamliner. deliverieswhile United’s Boeing 777 fleet, which represents 10 percent of its capacity, remains grounded after an engine incident last year.
Demand has continued to grow as people pay for the summer leisure trips they’ve been itching to take during the pandemic, and airlines report increased customer willingness to pay for premium seats.
The recovery in business travel is also accelerating, bringing less price-sensitive travelers into the mix. About 85 percent of American’s domestic business revenue had returned by the end of March.