US airlines are set to raise ticket prices further as Americans ignore the fastest rise in domestic airfares in decades in their determination to travel.
Airfares rose 18.6% in April from the previous month, the biggest one-month increase in the history of the consumer price index, according to the US Bureau of Labor Statistics. They were a major contributor to the CPI’s 8.3% rise last month.
On a yearly basis, the airfare index rose 33.3%, the biggest year-on-year increase since 1980, although prices are still depressed at the same time in 2021 due to the Covid-19 pandemic. .
“We hope that customers will tolerate [increasing prices] for a long time,” said Jeffrey Goh, chief executive of Star Alliance, the global airline consortium that includes United Airlines and Lufthansa. But “the industry is not deaf and blind to the knowledge that the cost of living and rising inflation [are] a risk for the recovery of the industry”.
Demand exceeds supply of seats, allowing carriers to pass on high fuel and labor costs to customers. Travel spending is growing across the board with the fastest acceleration in airfares, so booking momentum should continue, said Michelle Meyer, chief U.S. economist at the Mastercard Economics Institute.
Strong wage growth and inflated savings mean consumers “may be able to tolerate price increases for longer, especially for a type of spending they favor,” she added. There is also no sign that the current Covid-19 rate spike has slowed airfare spending as it has in previous waves.
Amid robust and pent-up travel demand, US airlines remained optimistic about summer travel and its overall recovery, despite inflationary pressures on consumers.
“Demand is as strong as we’ve ever seen it,” American Airlines Chief Executive Robert Isom said on an April earnings call. American, United and Delta Air Lines, the three largest U.S. carriers, expect profitable second quarters, with United forecasting record quarterly revenue.
United did not pre-sell seats for discounted summer travel, chief commercial officer Andrew Nocella told an industry conference in March. “We’ve saved the seats and are now selling them at much higher returns, so we’re pretty happy with that.”
The average price on all US 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 April 11, according to the US bank. Raymond James.
Meanwhile, US carriers are offering 7% fewer seats in the second quarter compared to the same period in 2019, according to Raymond James analyst Savanthi Syth.
“There is always a [price] cap because at some level there will be demand destruction,” said Cowen analyst Helane Becker, but “we don’t see near-term demand destruction.”
Becker predicted prices would rise 7% per month until at least June and Americans could tolerate increases until after the summer. “We are worried about September [and] October reservations.
Seat capacity is limited due to rising fuel prices and staffing issues, including pilot training bottlenecks, said Syth, who believes increases will continue for a few more months.
“Fuel, which accounts for 25-40% of airline costs, is nearly 80% higher,” she said. The Big Three U.S. carriers, which do not cover fuel, reported success in passing the cost on to passengers.
Airline labor costs have also increased as they raise wages to attract and retain workers. Flight plans were further affected by the lack of planes: American cut its schedule after continued delays in Boeing 787 Dreamliner deliveries, while United’s Boeing 777 fleet, which represents 10% of its capacity, remains grounded after an engine incident last year.
Demand has continued to grow as people shell out for the summer leisure trips they’ve been looking forward to during the pandemic, with carriers reporting greater customer willingness to pay for premium seats.
The recovery in business travel is also accelerating, introducing less price-sensitive travelers into the mix. About 85% of U.S. business revenue had returned by the end of March.