Airlines offer reasons for sky-high fares, but analysts see something premeditated

Airlines offer reasons for sky-high fares, but analysts see something premeditated

SEATTLE — After two years of being mostly grounded, Americans have rushed to book summer flights this year — and are paying very high prices for their tickets.

Airlines plead for an imbalance between supply and demand. pilot shortage. Rising kerosene prices. These factors are real.

But airline analysts now see something more conscious at play.

As people have started to balk at the sky-high prices, and some are turning their backs on flying, demand has waned. The airlines’ response is not to lower fares, but to keep them high by further cutting the number of seats available.

“You’re starting to see some resistance from passengers to paying these fares,” said George Ferguson, senior aerospace and airline analyst at Bloomberg Intelligence. “At that point you either lower the fares and fill the planes or keep the fares up and start reducing capacity. So we saw them reduce capacity.”

In short, airlines continue to reduce flight schedules in July and August, not necessarily because they don’t have enough pilots, but partly to keep ticket prices high and maximize profits.

“They know how many pilots they have to meet that schedule. And they’re still cutting,” Ferguson added. “The lack of pilots is a convenient excuse here. I think they can’t fill planes at the fares they offer. Instead of cutting those rates and lowering their profitability, they cut the schedule.”

A current economy class ticket from Seattle to New York costs just over $1,000. A non-stop ride from Seattle to Cincinnati costs $1,300. And Seattle-Los Angeles is $400-$500.

For many, the high prices dramatically increase the cost of a vacation. For those who need to travel at short notice, perhaps for family reasons, this may not be a matter of choice.

In a country as large as the US, with few practical alternatives for longer trips, the airline network is an important part of the country’s transportation infrastructure – the price has now become unattainable for many people.

Aviation industry analyst and consultant Bob Mann said that if it weren’t for all the pent-up demand for travel, “nobody would be buying travel at these prices.”

“There’s a perception that airlines think they can charge whatever they want because demand is increasing,” he said.

“Crazy” tariff inflation

The air travel system in the US is obviously under pressure as it is plagued by delays and flight cancellations, causing tremendous inconvenience and often large additional costs to travelers.

During April and May, Alaska Airlines did not have enough pilots to fly its schedule, resulting in hundreds of canceled flights. Struggling to cope, the Seattle-based airline cut its schedule by 10% this month.

Over the Memorial Day weekend, Delta suffered a major meltdown, canceling more than 700 flights, or 7% of its schedule. By early August, 100 daily flights had been suspended.

Hundreds of thousands of passengers were massively disrupted in their travel plans this year. But even though the quality and reliability of the US air transportation system has fallen catastrophically with no improvement in sight, ticket prices have skyrocketed.

Average vacation prices last week were 41% higher than the same week a year ago, according to data compiled by Bob Harrell, who tracks airfares for travel industry analysts through his consultancy Harrell Associates.

Compared to pre-pandemic times, the price surge is even bigger. Harrell’s data for a five-week period in March 2022 shows average leisure fares were 52% higher than the same period before COVID 2019.

“It’s amazing,” said Henry Harteveldt, travel industry analyst at Atmosphere Research. “I’m very concerned that we’re going to reach a tipping point and consumers will just say enough is enough. They will only limit their travel.”

Airline revenues soar after long drought

The pandemic explains some of the price pressure.

In the historic air travel crisis of the last two years, airlines have had to drastically cut their flight schedules and their workforce. Facing labor shortages — including pilots, flight attendants, baggage handlers and call center agents — airlines have yet to fully bring their staff or their flights back.

As a result, fewer airplane seats are now available than before the pandemic. Delta seating capacity in July is 85% of July 2019 capacity.

“You’re squeezing a lot more people into a lot less capacity,” Harteveldt said.

Rising kerosene prices since the Russian invasion of Ukraine are another factor. The price of kerosene is twice as high as a year ago.

Alaska Airlines, in a filing this month, forecast that it will pay 60% more for jet fuel this quarter than it did in the same period in 2019, despite a fuel hedging strategy to mitigate the margin of higher costs.

And after two years of deep red ink and accumulated debt, US airline CEOs are seizing the opportunity to recoup some of their massive losses.

At an investor conference this month hosted by Sanford Bernstein, Delta CEO Ed Bastian said “demand has been off the charts.”

“It comes with the leisure, it comes with the premium consumer. It comes with company, comes with internationality,” he said. “We expect prices to probably rise between 25% and 30% on average this summer. We’ve never seen anything like it.”

At the same conference, American Airlines CEO Robert Isom said the airline maximizes its revenue by not selling out all of its seats months in advance, but by keeping many of them open to passengers who buy tickets closer to the flight date at higher prices.

“We’re doing a great job of making sure there’s likely still plenty of capacity to buy at higher prices,” Isom said. “We are able to reserve enough (seats) to ensure we can take advantage of the tighter demand.”

A tough summer to travel

Ironically, the service that passengers pay more for has never been this bad.

Mann notes how service has deteriorated over many years to the point where the airline industry is now virtually self-service.

“You make your own bookings, your own boarding passes. You make your own fee purchases. You check in yourself and bring your own stuff on the plane,” he said. “Sometimes you get charged for all of those things, in addition to doing them yourself.”

In the best case, at least the journey can go smoothly. But prepare for a rougher trip this summer.

Mann predicts airlines will not have enough reserve pilots to cover additional flights as crews hit their federally mandated flight limits each month, potentially exacerbated by weather-related disruptions or COVID outbreaks, as was the case in Alaska.

“I can pretty much predict at the end of each calendar month that the last four or five days are going to be very difficult operationally,” he said.

He added that although airlines have voluntarily cut flight schedules, airline insiders he spoke to are fearful of what lies ahead this summer.

“They don’t have confidence in the ability to run a schedule so reliably that the system just doesn’t crash,” Mann said.

Harteveldt agrees it’s going to be “a really tough summer for people to travel”. If cancellations occur, it will be difficult to find space on other flights to rebook stranded passengers.

“All airlines are full or almost full,” he said. “If something goes wrong, there’s just less room for the industry to recover.”

“The travel industry is doing a lot to piss off the traveling public this summer. And it’s not just the airlines,” added Harteveldt. “Hotels have reduced their service. Rental car companies take reservations and then tell the people who show up, no, we don’t have a car for you.”

After Labor Day

A reaction to the high prices has already started.

Harteveldt said his contacts in airline reservations departments “are starting to see a slight slowdown in booking speeds”.

Coast-to-coast fares of $1,000 or $1,500 “are a big turnoff for many consumers, especially people who are traveling on their own,” he said.

Mann said airlines must be careful not to force a change in travel behavior that will destroy current demand.

“A lot of people will say, ‘Gas prices are high, but when I get in the SUV and even if I pay the toll and drive six or seven hours, it’s really not that bad,'” he said.

Airlines will realize this sooner or later, he said.

“They drink their own Kool-Aid for a while … so they charge those prices until people say no,” Mann said. “Then they realize, ‘Wow, wait a minute, we may have overstepped our bounds here.’

“Yes, there is an imbalance between supply and demand, but not to this extent,” he said. “We can’t price people down 30, 40, 50% and not get an answer to destroying demand.”

One bright spot: airlines are unlikely to be able to sustain the high prices when summer comes to an end.

“When the economy sneezes, the travel industry catches a cold,” said Harteveldt.

With consumers battered by inflation in almost every spending sector and worried by a shaky economy, fall holiday travel is likely to fall sharply once those already booked are completed.

And while business travel is making a comeback, it’s still a long way from where it was before the pandemic.

So Ferguson sees a tough second half for airline profitability amid lower demand that will push ticket prices back down.

“The number of people willing to pay will drop significantly after Labor Day,” Ferguson said.