Airlines offer reasons for sky-high airfares, but analysts see something deliberate

SEATTLE — After being mostly grounded for two years, Americans hit to book summer this year — and are paying very heavy prices for their tickets.

Airlines plead an imbalance between supply and demand. A shortage of pilots. Soaring jet fuel prices. Those factors are real.

Yet airline analysts now see something more deliberate at play.

As people have begun to balk at the sky-high prices, and some switch plans away from flying, demand has softened. The airline response is not to lower the fares, but to keep them high by further cutting the supply of seats.

“They’re starting to see some resistance from flyers to paying those fares,” said George Ferguson, senior aerospace and airline analyst at Bloomberg intelligence. “At that point, you either lower fares and fill airplanes, or keep fares high and start to cut capacity. So we’ve seen them cutting capacity.”

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

“They know how many pilots they have to fulfill that schedule. And they’re still cutting,” Ferguson added. “The pilot shortage is a bit of a convenient excuse here. I think they can’t fill airplanes at the fare levels that they’re offering. And so instead of cutting those fares and lowering their profitability, they are cutting the schedule.”

A recent economy-class ticket from Seattle to New York cost just over $1,000. A nonstop trip from Seattle to Cincinnati runs $1,300. And Seattle-Los Angeles will cost $400-$500.

For many, the high prices dramatically bump up the cost of a vacation. For those who must travel on short notice, perhaps for family reasons, it may not be a matter of choice.

In a country as big as the US, with few practical alternatives for longer journeys, the airline network is a vital piece of the nation’s transportation infrastructure — now being priced out of the reach of many people.

Airline industry analyst and consultant Bob Mann said that if not for all the pent-up travel demand, “there’s no way anybody would be buying travel at these prices.”

“There’s a view that because there’s a surge in demand, the airlines think they can charge whatever they want,” he said.

“Mind-boggling” fare inflation

The air travel system in the US is patently under strain, beset by delays and flight cancellations that cause huge inconvenience and often great additional expense to travelers.

In April and May, Alaska Airlines didn’t have enough pilots to fly its schedule, resulting in hundreds of canceled flights. As it struggled to cope, the Seattle-based carrier cut its schedule by 10% through this month.

Over the Memorial Day weekend, Delta suffered a bigger meltdown, canceling more than 700 flights or 7% of its schedule. It cut 100 daily flights through early August.

Hundreds of thousands of passengers have had their travel plans massively disrupted this year. Yet even as the quality and reliability of the US air travel system has dropped disastrously with no relief in sight, ticket prices have soared.

According to data compiled by Bob Harrell, who tracks airfares for travel industry analysts through his consultancy Harrell Associates, average leisure fares last week were 41% higher than for the same week to year ago.

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

“That’s mind-boggling,” said Henry Harteveldt, a travel industry analyst with Atmosphere Research. “I’m very concerned that we’re reaching a tipping point and consumers are simply going to say enough is enough. They’re just going to cut back on trips.”

Airline revenue surges after long drought

The pandemic explains part of the price squeeze.

In the historic air travel downturn of the past two years, airlines had to cut their schedules and their workforces drastically. Now, with shortages of labor — including pilots, flight attendants, baggage handlers and call center agents — airlines haven’t yet fully brought back their people or their flights.

Only fewer airplane seats are available now than in pre-pandemic times. Delta’s seat capacity in July is 85% of what it was in July 2019.

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

Soaring jet fuel prices since the Russian invasion of Ukraine are another factor. The price of jet fuel is twice what it was a year ago.

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

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

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

“It’s coming with leisure, it’s coming with premium consumer. It’s coming with businesses, coming with international,” he said. “We expect pricing this summer to be up probably somewhere between 25% and 30% on average. We’ve never seen anything of that scale.”

At the same conference American Airlines CEO Robert Isom said the carrier is maximizing its revenue intake by not selling out all its seats months in advance, but holding many of them open for passengers buying tickets closer to the date of flight at higher prices.

“We’re doing a great job of making sure that there’s plenty of capacity still to be bought quite likely at higher prices,” Isom said. “We’re able to reserve enough (seats) to ensure that we’re able to take advantage of closer demand.”

A tough summer to travel

Ironically, the service passengers are paying more for has never been worse.

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

“You do your own bookings, your own boarding passes. You do your own fees purchases. You do your own check-in and you get your own stuff on the plane,” he said. “Sometimes you’re even charged for doing all those things, in addition to doing them yourself.”

At the best of times, at least the journey can run smoothly. But this summer, prepare for a rougher trip.

Mann predicts that when crews reach their federally mandated flying limits each month, perhaps exacerbated by disruption due to weather or by COVID outbreaks, airlines won’t have enough reserve pilots to cover additional flying, as happened at Alaska.

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

He added that even though carriers have voluntarily cut their schedules, airline insiders he has talked to are fearful of what lies ahead this summer.

“They have no confidence in the ability to run a schedule reliable enough that the system simply won’t melt down,” said Mann.

Harteveldt agrees that it will be “a really tough summer for people to travel.” When cancellations occur, it will be hard to find open seats on other flights to rebook stranded passengers.

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

“The travel industry is doing an awful lot to piss off the traveling public this summer. And it’s not just the airlines,” Harteveldt added. “Hotels have cut back on service. Rental car companies are taking reservations and then telling people who are showing up, nope, we don’t have a car for you.”

After Labor Day

A reaction to the high prices has already set in.

Harteveldt said his contacts in airline reservation departments are “starting to see a slight slowdown in the booking velocity.”

Coast-to-coast airfares of $1,000 or $1,500 “are a big turnoff to a lot of consumers, especially people traveling on their own dime,” he said.

Mann said the airlines have to be careful not to force a change in travel patterns that destroys the current demand.

“A lot of people will say, ‘Gas prices are high but if I get in the SUV and even if I pay the tolls 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 keep charging those prices until people say no,” said Mann. “Then they realize, ‘whoa, wait a minute, we may have overstepped our bounds here.’

“Yeah, there’s a supply and demand imbalance, but not to this extent,” he said. “We can’t push people up 30, 40, 50% on prices and not get a demand destruction response.”

One ray of hope: the airlines likely won’t be able to maintain the high prices when summer ends.

“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 the shaky economy, once the already-booked vacations are complete, leisure travel is likely to fall off precipitously in the fall.

And while business travel is beginning to come back, it’s still far off where it was before the pandemic.

So Ferguson sees a tough second half of the year for airline profitability amid lower demand that will bring ticket prices down again.

“The number of people willing to pay up is going to decrease significantly after Labor Day,” said Ferguson.

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