Published airline ticket prices are up over 50% compared to last year, and up 40% since the beginning of the year, even though what people are actually paying may not be up that much due to sales and discounting. But any way you cut it, people are paying more to fly now and likely will this summer too. Normally, airline customers show high price elasticity, meaning that even small changes in price result in large changes in demand. This how Southwest in the 1980s, and low-cost airlines like Spirit and JetBlue today, are able to grow the market with low fares. So with fares so much higher this year, in pre-pandemic times this would suggest greatly reduced traffic demand.
Yet, planes are booking quickly and demand seems to be quite strong. So while there are good reasons that prices are higher today than last year at this time, the effect on demand seems different than what otherwise may have happened earlier. Here are four reasons why the fares are up:
We are all paying more to fill up our tanks, and it’s the same for airplanes. Fuel prices are a high source of airline costs, so it’s not surprising that passing this on to customer fares is happening.
The only airline cost higher than fuel is people, and the shortages being seen everywhere affect this industry too. This is compounded by the fact that for the first year of the pandemic, some airlines offered early-outs to senior pilots, flight attendants, and mechanics. Flights are being cancelled and future schedules trimmed due to concern about staffing. Projections of labor costs rising are everywhere, and likely this will be a permanent cost increase for many airlines. For international trips that would normally fly over Russian airspace, longer and circuitous routings also make these flights more expensive.
Nothing affects price like strong demand. And while summer 2021 provided some domestic encouragement for air travel, 2022 looks even more promising domestically and internationally. Removal of the onboard mask mandate has only furthered this increased interest in travel. Flights today are quite full, and as the summer heats up it is becoming harder to find good airline deals.
While domestic business travel is still well below 2019 levels, it is leisure travel that drives summer volumes. Most encouraging for airlines this year is a return of the longer distance, international traveler. There are fewer country restrictions in Europe especially, so flights to Europe will likely be packed as people look to explore areas not practical to visit over the last few years. Even some group travel, including school trips, are possible this summer, adding to a strong base in what looks to be the most normal-looking summer since 2019.
Along with strong demand, most U.S. airlines are limiting their summer capacity due to labor and other shortages. In order to reduce the risk of flight cancellations, some airlines are trimming their summer schedule to ensure more reliable operations. This is a prudent approach for the long-term perceptions of the industry, but also comes when demand is strong. This one-two punch makes for the perfect environment for raising fares, and is driving the large year-over-year price increases.
It’s important not to underestimate this capacity impact. Revenue management systems used by all major airlines work by forecasting demand at different price levels and comparing this to the available seats to sell. With reduced capacity, these systems will stop selling the lowest fares much earlier in the sales cycle so that seats will be available for those willing to pay a bit more closer to the flight’s departure. Airlines can always sell cheap fares, so selling cheaply too early in the sales life of the flight doesn’t make sense. It’s possible that some flights may have more attractive prices in July or August if they haven’t booked as well as expected. But for those planning trips now, they likely cannot take the risk to wait for that uncertain opportunity.
A Long Time Since Profitability
The U.S. airlines haven’t regained meaningful profitability since the pandemic started. They successfully lobbied the government for support to keep people employed during the depths of the crisis, and have generally been prudent about costs and capacity management as demand has returned. With high fixed costs of planes, facilities, and people, airlines are eager to return to a financial condition where they can again provide a return on this invested capital.
Several U.S airlines have projected that they will return to profitability in the second half of the year. This is both a prediction and an aspiration for some, but all see this summer as the key to making this happen. It is rare when the economic planets align so well in terms of demand and supply, so despite the increases in costs, airlines want to leverage this summer for all it can be worth. This may be one of the few times in economic cycles when airlines stay disciplined about pricing rather than the usual race to the bottom to fill otherwise empty seats.
Why Customers May Not Mind
Inflation is affecting everything we buy today. It makes some people feel better to blame Vladimir Putin, government spending, poor Federal Reserve policies, or Donald Trump. No matter the cause, consumers are expecting higher prices everywhere and so when they see it for travel, it’s not an immediate shock. In addition, while airfare is an an expensive and important part of a long trip, it is not the only expense. Hotel rates, rental car rates and availability, and even golf tee times are all higher year-over-year. This means that those willing to travel have accepted that it will cost more yet are still making plans.
It’s not like travelers are immune to higher prices. It’s just that for the last two years many, many people chose to stay home or traveled by car, and the eagerness to get back to real vacations is significant. The staycations of the last few years have been generally less expensive than longer domestic or international trips. This means that some consumers are also rationalizing a higher price because this year’s trip is making up for several years. Whatever the reason, typically high airline price elasticity is taking a pause right now as the combination of limited capacity and normalization of travel is resulting in higher airfares with unusually strong demand. For an industry that was so directly hurt by this pandemic, this potential summer travel oasis is especially welcome and could return the industry to a stable financial position.