During the United Airlines second quarter earnings call on Thursday morning, CEO Scott Kirby laid out his belief in how economic forces will drive up airline industry revenue. In response to a question by J.P. Morgan’s Jamie Baker, Kirby explained his belief that mean regression alone will mean higher fares.
- “I think that absolutely the airline revenue to GDP ratio is going to trend back upwards.. every time capacity gets ahead of demand this ratio [declines]… demand for air travel is inelastic.”
- “It really is just as simple as this ratio goes down when supply exceeds demand…I am incredibly encouraged to see the rapid response that is happening..beginning mid-August.”
- “I’ve been through these cycles with capacity many times in my career, this is the fastest response..I’ve ever seen.”
Kirby says that airlines cutting back capacity means fares will rise (because demand will remain stable) and therefore fares will rise. Airlines will earn more money for their product. And the reason he knows it works this way is because historically airlines earn a fixed share of GDP, and currently airlines are earning a lower than average percentage of total economic activity.
Six years ago Scott Kirby explained his belief that over the long term airfares earn a fixed rate of GDP, that demand for travel is unmoored to price, and that airlines only harm themselves when they discount. At the time he explained,
- Airfares can rise because airline revenue as a share of GDP is lower than what it used to be.
- He thinks lowering fares is self-defeating, it doesn’t bring in more sales it just lowers the revenue earned from each ticket.
Later that same year he argued that airfares will eat GDP and that fares should double. Because “in the last 30 years airline revenue as a percentage or GDP has gone to about .6 from about 1.2%… we are under pricing our product by 50%.”
In what Kirby describes as ‘economics 202’ he rejects the notion that in a competitive industry price should fall towards marginal cost.
He continued to present data last year that fares should rise, because airline revenue is below historical average relative to GDP. It’s a point of faith for Kirby, that he’s stuck to for years, but it hasn’t… happened.
Implicit in Kirby’s analysis is that airline product isn’t really differentiated, and sales do not spur demand. People buy travel when they want or need to travel, unaffected by price. That doesn’t seem accurate.
And it assumes that air travel isn’t replaced by other technologies. Online communication doesn’t change the overall demand for air travel, and neither do other modes of transportation. It also would only hold if growth in supply of seats matches growth in demand. In fact, in congested areas of the country air travel growth is limited by air traffic control competence at technology implementation and hiring, and an inability for congested airports to expand.
Of course, even if airline revenues revert to historical average as a percentage of GDP, if GDP falls that will be a drag on revenue. The overall health of the economy affects demand for air travel! It also means overcapacity, driving down fares as airlines compete for even a fixed pie of travel demand..
He could not be more wrong. Demand will settle back to more traditional ebbs post-Labor Day, with the torrid demand for TATL travel in particular dropping back to seasonal levels and business travel softening a bit in the early Fall.
…in real dollars or inflated dollars?
And in about 4-6 weeks we’ll see a lot of sales for 30% off to fly after labor day.
Put a cork in it Kirby and concentrate on fixing your non-existent customer service first.
Kirby is wrong.
I have flown to Europe in the late winter, early spring when fares are low.
I have decided against domestic travel if fares are high. Sometimes, I have paid the higher fare, though.
Zoom has cut a few business trips. Not all, just some.
Or is this an attempt at price signalling — “You raise your fares and we’ll raise ours”?
I’m not paying $800 for DC to Milwaukee. I was already on the fence about personal travel to Asia this fall. Jack those up and I’ll stay home. It will be interesting to see what others do. He has some hefty labor costs to cover.
@ Gary — “Skyrocket” is totally over the top. Airfare is not going to skyrocket, unless that is what you call a 3% increase.
@Gene – Kirby has in the past argued that this analysis supports a 50% increase in fares.
Its his job to make it look like hes got all the answers
Going into one of the most depressing elections of our lifetime this Fall,economic realities for some and the shoulder season past labor day good luck with those rosy predictions
Uniteds fares are almost always outrageous and the experience just fair at best
I usually save a hundred or more looking at any of their competitors.
And with better connections,routings or non stops
I plan to be traveling far less until the prices come down
I’ve seen Southwest offer some very good deals this year with their sales promotions
That said I only use them for 1 hour flights typically.
American for most everything else.I threw Alaska to the curb as they became awful on pricing and customer service regarding problems since COVID.United he*l no not never just once in a very blue moon.
It is a bold assumption for him to model based on airline revenue reverting to a historical percentage of GDP. Tech and manufacturing may rise as a % of GDP due to the rise of AI and the possibility of a manufacturing onshoring boom.
@ Gary — Well, clearly demand for air travel is more elastic than Kirby thinks. If the price went up 50%, we would definitely be reducing our fliying ALOT. In fact, at those proces, we would probably reduce our TOTAL spedning on airafre becuase we would substitute with staycations and driving further.
AA seems to have started aggressively offering discount fares through 3rd Party travel agents for the first time in quite a while, so I don’t see how this can possibly be the case.
Kirby only knows name tags.
OMG KIRBY IS OBTUSE. Ask any economics professor who would snort out their beverage through their nose if they read his reasoning
Typical United ripoff. Jack up the prices and lower service.(i.e. minimum wages for most. Scott gonna get a nice bonus though, wake up people . Airlines invented the way to Jack someone’s wallet.
I don’t think Kirby is obtuse.
He’s just got a myopic, singular focus… shareholder value. Nothing else matters to Kirby and he has a track record at both AA and UA of eroding service to maximize earnings.
Kirby has publicly dared the public before to not fly United. But they always come back because while pax bitch and moan and complain, they still need to get to where they want to go and will endure the garbage Kirby puts in front of them.
All I know is the month of July is a peak travel period. Are we supposed to believe that demand will push fares higher in September then they were in July? I think this is highly unlikely.
I mean…it would be good if certain crowds were priced out of buying plane tickets on the big three and relegated to the ULCC’s.
people don’t seem to realize that airlines compare year over year capacity and that is what Kirby is speaking about.
AA is likely one of the carriers that will be reducing capacity; they are seeing weak results.
But let’s also acknowledge that UA needs for other carriers to fail or pull back capacity in order for UA’s massive capacity additions to work – if Boeing can deliver the aircraft that United needs.
other carriers are not going to cut capacity as much as UA wants but fares have to go up or several carriers will not see many more winters at least of the size they are now
United has to pay for all the contract raises they are incurring or shortly to incur. Kirby has to make up a reason for raising airfares that might fly with consumers (and honestly if one airline does/says it the others will too), he also wants to bolster investor confidence ahead of all the contract negotiations. So, probably less fact-based argument/claim by him, than based on those two reasons and necessity.
However, if UA thinks they can charge Delta prices for lower quality and service, they are going to be disappointed by the results. I am a UA loyalist of many years. I pick UA bc it has TOLERABLE service and quality on board and is cheaper than Delta. As a 1k the main thing that helps is the 1k call line, since it raises customer service to good levels and I can put up with mediocre food, seats, and service on the plane. AA however. even when I had high status, treated me horribly and so the lower cost wasn’t worth it to me in frustration and bad service.
I wonder if there are any studies done of why people pick a flight most often (price, schedule, service, loyalty), and broken out by leisure vs work trips. I think most people pick due to price, and for business it may be schedule/loyalty but I feel like I keep reading that post-pandemic business travel is still relatively low.
Maybe there are misgivings about agreeing to the recent pilot pay raise? Pilot salaries of $500K (widebody planes) are not economically sustainable. With AI, Zoom, virtual reality, and other technology, the need for in-person travel will continue to decrease. And 99% of commercial plane travel is done by computer and GPS. Very foolish to aggravate these long-term labor costs…makes no sense
If Kirby thinks the demand for air travel is inelastic, he must have been cutting Econ class. Demand for a product may be inelastic, but demand for a particular brand is elastic. You need salt to survive, making it a classic example of an inelastic product, but you don’t need Morton’s Salt–there are substitutes. There are other airlines, and other ways for people to get from point A to point B.
He may have a point, to some degree, about business travelers, but for leisure travelers… nope! Thanksgiving travel excluded, most leisure travelers do not say “screw it, I really want to go to Paris this summer, damn the price!” Case in point right now, the prices around the Paris Olympics!
Scott is right about the correlation between GDP and air travel, but fails to take into account disruptor activity that can change the relationship between them.
He’s also right that history repeats itself in approx. 10-15 year cycles. He’d be wise to read up on the fate of James Goodwin though, the last United CEO to peg his costs to the apex of revenue.
$3000 for Premium Economy to Germany from DFW and I’m “supposed” to be paying $6000? Gimme a break. Multiple airlines will go bankrupt if they try to raise prices at all right now, muchleas DOUBLE them.
I really have to give Kirby props for his absolute fixation with viewing everything from the perspective of a soulless bean counter. His only concern is charging poor saps – I mean passengers – as much as possible. Lots of businesses do something similar but Kirby really excels at it. He really missed his calling on Wall Street where that myopic and tasteless greed is actively celebrated.
What does “Skyrocket” mean? What percent are we looking at? Or is it just hyperbole?
It probably doesn’t help with the problems Boeing is having. Not getting airplanes delivered means not being able to provide more seats.
@Roger – Kirby has in the past suggested 50%
Mr Kirby is only interested in the value of the stock. He has no concerns for his employees or customers. If he can’t figure out how the economy works he should keep quit. He didn’t see what happened in the fast food industry, prices got too high and people stopped eating there. Same thing in the airline industry, prices get to high and people won’t fly. It’s as simple as that. The airlines always try and push the envople and then the layoffs come. I’ve been flying since 1979 and nothing changes. Let him think like he know what going on. Didn’t he think air travel would take 4 years to come back after covid? He’s a rocket scientist.
” fares will rise (because demand will remain stable) and therefore fares will rise”
This is circular logic to a “T”. Economics suggests that if fares rise, some demand will drop.
lol this geniuses think ppl will pay whatever amount of $$$ to travel with you? you started those expensive contracts believing that ppl will pay whatever amount without you and your cronies taking less but no you are talking more they too and Pilots soon FAs Mechanics and it will be at one point that it will be unsustainable because ppl won’t pay that money or you will need 1K airplanes with 440 pax capacity with the economics of the A220 or E190 and have them all full every day and that won’t happen your operational cost is about to get very high.
Maybe it would be way better for No One to listen to this Kirby character cause clearly he just wants to rip everyone off
UA has been able to fill its planes with higher prices domestically because it does have the best overall route network (better than AA, AS or DL) and provides superior service than most of the LCCs, which a lot of people actively avoid. DL may get premium fares, but there are a lot of places it doesn’t go but UA does. Internationally, though, at least US-EU, demand seems to be really falling off. A number of TATL flights I have taken recently, including on UA, have not been full, and that is striking compared to as recently as spring. I’m not sure UA can continue to count on inelastic pricing there. The other airlines have been cheaper for J by far (VS, BA, AF and LX in particular). If there is excess capacity, people are going to fly those if UA does not drop prices, particularly since loyalty is not as much of a factor anymore (and I used to be 1K for years).
I always suspected that the airlines only recruited from the bottom 10 percent of the MBA graduating classes. Thanks Mr. Kirby for confirming that.
Airline revenue to GDP can trend up if prices or/and capacity rise. He says he sees capacity decreasing but why would capacity decrease if prices are going to rise? It’s a bit like OPEC thinking they can reduce oil pumping and prices will rise but the US is simply increasing its market share. If United wants to lose market share they should definitely raise prices
Sheeeesh.. is it time for you to pick up another million in bonuses? Go take care of your employees first!
AA, UA, DL offer a shitty product at a shitty price. Their FF programs continue to deteriorate. We stopped playing the FF Elite game, with US programs, after COVID.
What none of these companies can figure out is how to consistently drive higher fares for a premium experience. That’s the only way they can justify their high labor, facilities, and fleet costs.
I would say domestically they’re leaving money on the table. A lot of discount F fares and buy ups have been cheap. They gave that product away for so many decades they do not have the data they need to understand the premium domestic cabin market.
Meanwhile Canadian and European companies offer a far more attractive FF program. The US is home to the most experienced consumers in the world. We’ll see what happens.
People regularly are sloppy with the terms supply and demand. There is a demand curve, the shape of that can change over time. Demand curves are essentially never 100% inelastic (i.e., they aren’t horizontal lines). Assume it is fixed over a period of time and elastic. A higher price leads to lower quantity demanded. This is a change in quantity demanded, but “demand” (i.e., the demand curve) is fixed.
I moved to the US from Europe and air fares are significantly higher here than Europe and have been the whole 10 years I’ve lived here. Some 2hr trips here can easily run for $300-500 one way and that’s several weeks out. Same distance in Europe and you can still snag bare bones easyJet/Ryanair flights for a tenth that price or even fly a mainline carrier for about half that cost.. Also it’s interesting to note (and blogs rarely mention this) that rt trips originating in Europe to the US are often significantly less than the same route in the opposite direction. If you can plan ahead (like I used to when returning home) used to be able to pay $500 or less rt I’m economy on a mainline carrier from Europe to NYC when the same trip the other way around was $800-1000.
And with their new found windfall, they plan to pay back their Covid relief right? I mean right??? 25 billion to keep these pirates running so that they can then OPEC us into higher fares. What he is signaling is intentional reduction in capacity to raise prices. No more bailouts. From here on in they make it on their own or die.
What is the best way make money in the airline sector? There is only one way: Short Airline Stocks, especially AAL!
Go ahead – raise prices and make my day, Kirby. There are plenty of cruise ships that don’t have doors flying off them or wheels falling off! And they have better lay flat beds and food service!
I admit I’m not an expert in airlines or economics, but how does this make sense? If you have more supply than demand, that suggests you have empty seats. Cutting those back does not increase demand. The only way that works is if they cut supply so much it artificially creates scarcity. But at that point you are turning away paying passengers for fun.
The only way his statement makes sense is if he just magically feels entitled to a % of GDP. “Kirby says that airlines cutting back capacity means fares will rise (because demand will remain stable) and therefore fares will rise.” No? If you have excess capacity and you cut it, the only way fares rise is if you decide to raise them arbitrarily. Am I not getting something?
Complain all you want, but he’s not wrong. People will continue flying the U.S. legacy carriers in record numbers, regardless of cost or quality.
Maybe United prices have to skyrocket to cover Scott Kirby’s annual 90% increase in compensation.
United CEO Scott Kirby, who is routinely one of the most highly paid airline executives in the U.S., made nearly $18.6 million in 2023, according to a proxy statement United filed Tuesday night. The year before, Kirby raked in around $9.8 million, and his pay was also around the same in 2021.
Some travel demand is inelastic (demand not impacted by price)–people “must” get to a business meeting or funeral or important celebration. But even that is within a range of price. United and the other carriers have proven this by making the experience suck, yet we still buy their service. However, the number of both personal and business trips I take is massively impacted by price. My travel demand is highly elastic.
He should be fired over his percent of GDP rationale; it reveals his intellectual capacity.
You never replied to me about the poor service I received last December …. And with all the United negatives raising prices will not help ! Just improve your customer service and your maintenace
The only lack of elasticity in airfares would be due to government policies permitting oligopoly.
I think that the underlying assumption that air travel is inelastic is wrong. When prices raise customers have several options depending on what type of travel (business, vacations). In addition in order to benefit from inelastic demand a company must be a monopoly or close to it which is certainly not the case with United or the air travel industry overall. Several cases of bad press have further eroded United’s market share.