Passengers are seen at the Delta Air Lines check-in desks at Hartsfield-Jackson Atlanta International Airport before the Fourth of July holiday in Atlanta, Georgia, July 1, 2022.
Elijah Newage | Reuters
Flights, believe it or not, are getting cheaper.
Airline ticket prices fell a seasonally adjusted 1.8 percent from May to June, according to the latest U.S. inflation data released last week. Prices were one of the few categories to decline at a time when consumer prices rose by the fastest jump in more than four decades.
Spring and summer travel growth — even at extremely high prices — has been a boon for airlines, lifting revenue above 2019 levels, even though airlines are flying less than before the pandemic, according to recent reports from major carriers such as Delta Air Lines and American Airlines.
Now the question is: How sustainable will demand be after the summer peak, as carriers and travelers grapple with persistent inflation and worries about an economic slowdown?
Executives from Delta to JPMorgan last week said consumers continue to spend voraciously on travel. But rising costs could affect household vacation budgets and companies’ appetite to send employees on business trips.
Soaring costs are already weighing on airlines’ bottom lines, and high fares are forcing some travelers to change their plans.
Ben Merens, a 62-year-old communications consultant, said he and his wife canceled their summer vacation plans because of a family emergency that occurred just before the Fourth of July weekend.
The couple had intended to travel to Denver or Seattle, but won’t after a death in the family, which meant last-minute tickets from their home in Milwaukee to New York to attend the funeral — which Merens said cost about $980 per number.
“The price is excessive,” Merens said before the return flight from New York’s LaGuardia Airport.
Less flying, more revenue
Fares often fall when the peak summer travel season winds down—kids go back to school and families end vacations—although business travel often increases. Airlines also adjust capacity for periods of lower demand so they don’t flood the market with seats they have to offer at low prices to fill.
Round-trip flights in the U.S. as of July 14 averaged $375, down from a May peak of $413, but still up 13% from 2019, according to ticket tracker Hopper.
However, airlines are optimistic about future sales, citing the pent-up desire to travel from both business and leisure travelers.
“People haven’t had access to our product for the better part of two years,” Delta CEO Ed Bastian said on the company’s quarterly earnings call last week. “We’re not going to satisfy … that thirst in a busy summer.”
Delta reported a profit of $735 million in the second quarter on revenue of $13.82 billion, a 10 percent increase in sales from the same period in 2019. The airline said sales of domestic corporate travel lagged most of the recovery of the industry, have jumped to 80% of 2019 levels.
Delta designs more muted revenue growth for the third quarter, however. The carrier expects revenue to rise 1% to 5% from 2019 levels and said it will limit its schedule growth until the end of the year, a measure that could in turn keep ticket prices high if frantic demand in seats of the passengers continued.
“We also recognize that our crystal ball is only about three to four months old right now, and it’s not as far along as people would like us to think,” Bastian said. “But everything we see tells us we have to run.”
American and United Airlines are also bullish and are due to report second-quarter results and provide an outlook to investors on Wednesday and Thursday, respectively. American on Monday forecast second-quarter revenue growth of 22.5% from 2019 for the three months ended June 30, up from its previous estimate of a 20% increase, on a slightly shorter timetable.
Still, airlines will have to deal with cracks in the red-hot labor market and concerns about economic weakness as the peak travel season winds down.
“Come fall, the impact of cost inflation on consumer and corporate travelers’ discretionary incomes and budgets could soften aggregate demand for air travel,” Moody’s Investors Service transportation analyst Jonathan Root wrote last month. “However, current capacity restrictions would prevent airlines from overcapacity if this were to happen.”
US airlines have largely cut their schedules after biting off more than they could chew this spring and summer. Many carriers sold schedules to passengers only to curtail flying later as staff shortages and other challenges prompted them to return.
Delta, American, United, JetBlue Airways, Spirit Airlines and Alaska Airlines are restricting flying.
A seasonal decline in flights can help airlines improve operations and offer more freedom to train their thousands of new workers without the summer deadlocks.
Delta’s Bastian said the carrier has hired 18,000 people since the start of 2021, about the number it lost during the pandemic when it called for employee buyouts.
“While we have over 95% of the employees needed to fully restore capacity, we have thousands in some phase of the hiring and training process,” Bastian said on the company’s quarterly call.
Southwest Airlines, for its part, said this week it had hired 10,000 people since January to bring its employee base to 61,000, more than in 2019.
Elizabeth Bryant, Southwest’s senior vice president of people, learning and development, added that “hiring and learning will remain a focus in 2022.”
Smoother operations could ease passenger concerns about delays and disruptions and keep demand high. But in the meantime, flying less means higher costs, which are often passed on to consumers.
“We pretty much cover the full costs of the airline, with only 85% of our flights being reimbursed,” Bastian said.
With strong demand, airlines can still charge relatively high fares — the opposite is true, which is why there were so many bargains at the start of the pandemic, when most potential travelers stayed home.
In addition, a decline in consumer spending or a downturn in the labor market could result in lower airline fares and earnings.
“Right now, people just have money to burn,” said Adam Thompson, founder of Lagniappe Aviation, a consulting firm. “Once people no longer have money to burn, you have to convince them that they want to buy your product.”