The CEO of United Airlines does not understand how airfares work. That may seem like a strange claim, but the things that he says about fares are just wrong.
- You might be loath to question the CEO of an airline over airfares!
- Especially a CEO that is highly successful. He is largely credited with turning United Airlines around.
- But he claims – and predictions – frequently turn out to be wrong.
Scott Kirby keeps insisting airfares should rise, and that airlines are too timid to charge what passengers will pay. But after years of predictions that have not panned out, the flaw in his theory is simple: airlines hate empty seats, and supply and demand still set fares no matter how badly CEOs want prices higher.
Probably because everyone just assumes he knows what he’s talking about, and has short memories, they rarely question Scott Kirby’s pronouncements. What’s great about listening to him is that he does not shy away from bold claims about the world. But those claims do not always stand up to scrutiny.
Right now he’s predicting higher fares and says that other airlines are just too shy to raise them because of dysfunction in their own organization (United is much bolder!). His model, though, for how fares are determined appears unmoored from relaity.
- Brian Sumers’ excellent airline earnings call wrap up asks the question, ‘if Scott Kirby says airlines can raise fares in a crisis, why not when there’s no crisis?’
- The United CEO’s claim was that there’s a push and pull between different factions inside the airline, and revenue management loses out to the political and marketing folks. All you need is to be a better-run airline and you can raise fares!
- Kirby says passengers are willing to pay more, if you just raise prices: “Air travel demand is inelastic, and there’s room to price more appropriately for our cost of capital.”
Kirby’s story about fare increases being unpopular, so marketing and government relations people become naysayers, makes little sense. American said that head of government relations Nate Gatten doesn’t involve himself in revenue management at all.
Sumers says “I know better than to question Kirby about airline economics” while expressing skepticism. I don’t know better! His predictions do not always come true! For instance, he’s told analysts that he’s given MileagePlus a goal to grow revenue by 50% in the next four years. Maybe everyone forgets, or is afraid to call him out, but he said that same thing in 2021 and it did not happen.
Kirby is always predicting higher fares. He laid out his theory for higher fares way back in 2018 that lowering fares is self-defeating, doesn’t bring in more sales it just lowers the revenue earned from each ticket, and that airfares would double because they should be a fixed percentage of GDP. Except this has never happened for as long as he’s been predicting it.
And in 2024 he said:
- “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.”
He argued in 2018 that airfares should double, because they had fallen to half their historic share of GDP.
Of course, United has been consistently lowering prices for years along with the rest of the industry. Is Kirby the one that’s just been listening to government relations and marketing, not revenue management? Meanwhile, Delta thinks they can do revenue management better precisely by offering targeted lower prices using AI.
However, GDP is rising for reasons different than they had in the past, that doesn’t involve airfare. We’re seeing billion dollar companies with just half a dozen employees. AI data center capex and chips do not require travel spend proportionate to what hyperscalers pay Nvidia and TSMC. That’s just the continuation of a long-run trend.
And the idea that airlines just set fares and consumers pay them is a monopoly story, but surely Kirby would not argue the current industry is capable of monopoly pricing.
- Prices are set by supply and demand. United has been growing seat supply and this pushes down prices!
- When an airline seat is going to go empty it costs almost nothing to fill it, so airlines compete with low fares to put a passenger in this seat. $99 is better than $0 when the marginal cost is pennies.
- If airfares doubled leisure travel would plummet. Some business trips would be replaced with conference calls. Some conference events that involve large numbers of people flying wouldn’t make sense.
- There’s a point at which total revenue falls when airfares rise. It’s tough to know exactly where that is in advance, but it varies significantly by customer type and route.
It is not just about having the will to raise prices even when it’s unpopular, or avoiding listening to the wrong people.
Costs to not directly determine airfares, either. Airlines do not take their average cost of a trip and add a profit margin to it to reach price.
The actual way that fuel price increases translate into higher fares is that airlines cut back on the number of seats they fly. Marginal routes are no longer profitable, so they reduce their plans for flying. Holding passenger demand constant, price goes up.
Of course passenger demand doesn’t stay constant. If high fuel prices lead to reduced economic growth or recession, you’ll get less demand for air travel too. If people lose jobs they’ll fly less for leisure (or if they’re less confident in their income stream). If markets decline, there are negative wealth effects.
So it’s possible to have higher fuel prices and lower fares. Nobel laureate economist Vernon Smith showed competitive prices can emerge with just four buyers and sellers. And as long as airlines have excess capacity they’ll compete down price.
The long-run cost of air travel is clearly down:
It’s not yet clear what will happen to fares. Some predictions Kirby makes turn out to be very correct. His predictions about fares over the past 8 years have not been among those.
Loyalty is limited.
I am enjoying the stropwafels.
The lounges are not as nice as DL.
The UA B737 is not as nice as the DL A320.
For my next transatlantic *A flight, I’m choosing SQ over UA, because i remember on my transpacific flighys how NH was much better than UA.
UA CEO couldn’t find me on the elastic rainbow if he tried.
I am glad you and Brian are calling *S on Kirby’s incessant proclamations which are incessanty wrong.
Kirby can’t seem to understand that the best way to get airfares up is to add less capacity – and yet UA has been adding capacity at a faster rate than other legacies.
And even now, UA is committed to taking hundreds of new airplanes over the next 2 years even as fuel prices mean he cannot discount fares and stand a chance at making a profit. And yet, UA has no plans to retire older aircraft so they will keep old aircraft in service and underutilize all of their fleet.
the shine is wearing off about Kirby. it was always a given that he would fall off the pedestal he built for himself.
When you claim you are an expert in revenue management and network and get so many basics about the industry wrong, a growing number of people are seeing through Kirby
It’s funny how things have changed- is UA the new DL (not in a positive way)? They ended up being the leader with basic business and premium economy. It’s still to be seen what the consumer response to this is, particularly at a time when I think economic uncertainty may finally put some more power in the corner of the consumers who are willing to spend vs the companies
Seems to me Kirby is right about 75% or more of the time. Glad I’m on that team, best CEO I have worked under since I started under Gerry Greenwald. I personally heard him say 3 years ago Spirit is toast, he was right amongst the majority of things I heard him say in meetings.
Tim, come on you don’t really believe UA won’t retire planes if the economy sinks in the next few years just because they say they are not going to at this point.Please you call yourself an expert, I disagree, if the economy tanks you will see lots of old planes gone, to pull capacity out. Just depends on how much the economy tanks.
Kirby will get his wish. With Spirit about to evaporate, ticket prices will surely rise in Spirit markets.
Perhaps Kirby is taking a page from the Trump playbook: if you say $#|+ over and over and over, you start to believe it. No one else does, mind you, but I’m sure Kirby does.
Tim
I think UA could make a lot of money if they marketed to mathematically challenged people, and started selling international biz class seats for 500-700K instead of 80K-145k. And they should stick to partners like Saudia and (when it was legal) Aeroflot rather than the ME3, JAL, ANA, SIngapore etc.
30west.
that is the point. UA has no choice but to retire older aircraft; the fact that they think that fuel is coming down and they will be able to use those old aircraft on top of all of the new deliveries is the only baffling part. Clearly FOMO.
Jon F,
poke at award travel and partnerships all you want but DL’s profitability is determined right here in the US of A, just as it is for UA (and AA, AS, B6, WN, etc).
Clearly DL has a better grasp of matching supply w/ demand and pricing what they are putting into the market.
You did see Cranky’s article about the 2 pretty empty UA flights he was on? I doubt seriously that AA and DL had flights at those times that there that lightly booked
@BigTee — Let them eat stroopwaffle!(@Gene…)
@30west — If you’re downtown NYC, that’s a nice address. You’re also right that UA’s gonna ditch 757 for XLR Coastliner; 763, and hopefully 772, both for 787. The older 737-700s, too, probably.
He’s not making a prediction, he’s signaling to competitors his willingness to engage in tacit collusion.
You can’t emphasize this point enough:
Which is exactly what has happened with me this year, only replace “some” with “virtually all.”
@Denver Refugee – exactly right. Or trips of 5 hours and under become driving trips, as happened to me 5x this year. At $400-$500 r/t, it would’ve been a flight. At $800-$900 r/t, it’s a rental car and a whole lot of dashboard time and phone calls.
Kirby is like some crazy old uncle kept locked up in the attic who somehow keeps escaping then spews a bunch of ridiculous statements to anybody who’ll listen.
Oscar Munoz turned United around. Kirby came in afterwards and garnered most of the credit from Munoz’s work. Kirby did make two good moves: Not cutting back too much due to Covid and reversing his early hatred for premium products at United. Otherwise he’s been more notable for his venom aimed at American for booting him out and a constant stream of super weird or childish utterances that make pretty much anything he says suspect.
Once Spirit is out of business, higher fares are coming.
I guess Munoz did all of us a disservice when he gave Kirby the feedback that people love to hear what he thinks. Perhaps slightly oversold that idea.
When you are earning +$30m per year its easy to become detached from reality. All you need is magical thinking and a strong PR team so that next year you get $35m.
data point – I think UA have jumped the shark, which will make it the shortest lived time at the top ever
Spirit may make his words right.
Hold on?! “after years of predictions that have not worked out…”?!!
On the actual DAY Spirit folds after an outsider prediction that the LCC models were broken and unsustainable.
Have you seen United’s financial trajectory during Kirby’s tenure? His Covid growth plan successes?
SMH. Might not like his approach, but give credit where due.
The industry needing capacity reductions doesn’t necessarily mean it has to be United.
United grew out of Covid on the back of everyone else reducing. Failed business models departing aid the growth of the solid.
There is excess capacity and as long as the legacies are able to make money off cc income that’s not going to change. It’s an incentive to fly around more planes with more seats. If airlines had to actually had to make a profit off of flying people from Point A to Point B it would be a much scaled down industry.
@George Romey — There’s more to life than RASM/CASM and load factor.
GullAir,
let’s be honest, though.
UA”s financial ascent has heavily been subsidized by employees that have been paid under industry norms. Let’s see how much UA’s costs increase with an FA settlement which will include even more retro. and then let’s hope the mechanics get a new and fair contract proposal before the end of the year – plus whatever groups need pay increases.
Ben covered it but DL non-union employees are getting another 4% raise so UA’s claims that its FAs will be the highest paid isn’t even true anymore; it was fully expected that UA FAs wouldn’t remain the highest paid by the time DL threw in a few pay raises which was certain to happen.
and Kirby has gone on a massive aircraft spending spree. Its supposedly higher earnings are being boosted by sale/leaseback transactions that make the income statement look better at the cost of the balance sheet. UA will be taking on far more debt as earnings fall w/ high fuel prices.
and let’s not forget that west coast and Asia fuel is priced much higher than elsewhere. GIven that UA uses so many older aircraft on TPAC routes, including from SFO, the increase in fuel expense is even more pronounced
Let’s see how UA’s finances look after a couple years of high fuel prices – which don’t appear to be coming down any time soon – and as UA labor costs hopefully raise (to the benefit of their employees) to industry standard levels.
and let’s also not forget that DL is the biggest beneficiary of NK’s shutdown because of the overlap between DL and NK at DTW, ATL and FLL esp. Since B6 is growing FLL to take up NK’s slack, the chances are they will pull down some JFK and BOS capacity which will also help DL more than any one else.
” Kirby has gone on a massive aircraft spending spree.”
UA has been growing faster and investing more than the competition for the last ten years and doing great financially since Covid. And if you subtract the FA retro pay from Q1 UA still makes $300m more than DL. People don’t seem to see what has been happening
Fleet size 2016/2025:
UA: 737/1,066..+329/45%
DL: 832/989…..+157/19%
AA: 930/1,013….+83/9%
OCF/Capex/FCF since 1/1/22 ($b)
UAL: 35.7/25.3/10.4
DAL: 31.6/22.2/9.4
AAL: 17.3/12.4/4.9
LUV: 9.5/12.7/-3.2
Net Income since 1/1/22 ($b)
DAL: 14.1
UAL: 10.5
AAL: 1.4
he’s putting feelers out there to see if his competitors want to do the same. Kirby sounds like he likes to hear himself talk whether or not he makes sense at all.
once again, you prove that 1. you have to rush to defend UA and 2. you don’t understand finances.
DL’s operating margin was higher than UA’s in the first quarter. Even if UA is able to successfully continue its 1Q trajectory, it has not closed the gap with DL.
DL took a non-cash charge for equity in foreign airlines which fell because of the soaring cost of jet fuel which has hurt airline stocks around the world.
Conversely, UA engaged in sale/leaseback transactions which technically improved its income statement but added debt to its balance sheet since leases are considered part of debt according to GAAP accounting.
DL’s streak is far less in danger of being eroded as it further increases its employee pay. AA’s margins are going to be improved by higher revenue – they are finally figuring it out – but hurt by higher fuel – but less so than UA and AS with large west coast operations. UA has no choice but to convert aircraft deliveries to debt via sale/leasebacks because no airline is going to generate as much cash.
UA’s massive aircraft spending spree was always risky precisely because what we are seeing now happens w/ regularity – costs increase – fuel and labor in UA’s case at a faster rate than the industry.
and UA hasn’t yet realized they will have to retire a bunch of airplanes before the end of the year because they cannot add as much capacity as the new aircraft plus their existing fleet could efficiently provide – and fuel prices are not coming down by the end of the year or early into 2027
DL has a better non-transportation portfolio and it is less subject to declines in demand with high fuel prices even as DL also benefits from lower fuel prices because of the refinery.
get back to us at the end of the year but the trend in operating margin is likely to widen between DL and 2nd place UA even as UA takes on more debt as its massive order book converts to deliveries as Boeing increasingly gets its act together
Same old tired LTD rantings with almost no supporting data, as usual.
It is amazing how much UA has grown while doing it profitably, investing in the product and paying down debt. It’s just a matter of time.
US domestic market share 2016/2025
DL: 16.4%/17.8%, +1.4%
AA: 17.2%/17.3%, +0.1%
SW:18.2%/16.9%, -1.3%
UA: 13.0%/16.6%, +3.6%
Since 2016 after Kirby’s arrival UA grew from 102 to 140 int’l destinations while DL shrank from 105 to 94 int’l destinations. UA overtook DL in the Atlantic and Latin America and is larger in the Pacific than DL & AA combined.
TATL destinations 2016/2025 : UA: 22/42 , DL: 32/34, AA: 21/20
TPAC destinations 2016/2025: UA: 23/32, DL: 15/8 , AA: 8/7
TLAT Destinations 2016/2025: AA: 92/97, UA: 57/66 , DL: 58/52
Q1 ’26 Net Debt (in $b)
SW: $1.3
DL: $13.6
UA: $17.9
AA: $27.4
UA: 1,100 aircraft, (233 WB), 181 WB/475 NB on order (15.2 average fleet age)
AA: 1,013 aircraft, (137 WB), 19 WB/258 NB on order (14.3 average fleet age)
DL: 987 aircraft, (179 WB), 85 WB/266 NB on order (14.8 average fleet age)
“Air travel demand is inelastic,”
That may have been true of business travel 10 years ago. It was never true of leisure travel, which is most of travel these days.
Southwest has tested this hypothesis at OAK, raising intra-California fares far about the more competitive SFO. The result is much lower traffic. Southwest keeps cutting the flight schedule at OAK because fares are too high. Elliott doesn’t care that a competitor may finally barge into OAK in 2028. Elliott will be long gone.
United needs to study Southwest’s results at OAK and decide whether to copy or do the opposite.
nsx gets it.
rebel does not.
Nobody has doubted that UA has grown and is large.
It is not industry leading in anything other than size.
and its size is driven by a need to make up for the strategic mistakes that included not paying attention to the domestic market while focusing on international.
UA has tried to bully every domestic competitor – except DL – and has repeatedly been stopped by the feds in its anticompetitive moves.
As UA’s costs grow faster than the rest of the industry due to fuel and labor cost increases, UA’s financials will separate more from DL.
And UA itself has said that it will be slowing its growth to levels on par or lower than DL; it is AA, not UA, that will be leading growth among the big 4. Whether AA can improve its financial position while adding so much capacity remains to be seen
When you hear elastic/inelastic put ‘more’ in front of it and realize that there is a difference between the industry and individual airlines. UA building out its high potential, but long underdeveloped domestic network.
US domestic market share 2016/2025
DL: 16.4%/17.8%, +1.4%
AA: 17.2%/17.3%, +0.1%
SW:18.2%/16.9%, -1.3%
UA: 13.0%/16.6%, +3.6%
“it is AA, not UA, that will be leading growth among the big 4. Whether AA can improve its financial position while adding so much capacity remains to be seen”
That is an excellent question. I have my doubts with high fuel prices, but we shall see.
@mantis for the win.
That’s exactly what this is……
rebel,
we agree that it is hard to know if AA can make its growth work but what UA achieved over the past 10 years is not likely to be the way the industry falls out in the next 3-5 years.
WN will start growing more aggressively as their customers increasingly perceive them for who they want to be now -not what they were in the past. UA has the most overlap by metro area of the big 3 with WN.
AA has a much stronger set of markets where it is dominant or larger by a wide margin than UA does which means they can grow more aggressively esp. since so many of their hubs are in southern high growth metros. ORD and PHL are lower margin hubs but will be offset by stronger hubs. AA’s revenue numbers for 1Q looked good. They are turning the corner.
and your data shows that DL has managed to grow to such a large position in the US domestic market; few people realize how big of a domestic airline DL is.
and DL will be growing in international markets esp. across the Pacific which will erode more of UA’s advantage than UA will gain in the US.
Kirby wants and needs higher fares as UA’s growth has to slow; the growth that UA had in the past cannot be duplicated in part because other airlines – including AA, DL and WN – will all continue to grow making it harder for UA to continue to grow in the domestic marketplace.
I said years ago this setup would take place and it is now happening.
You may be right. Kirby may be crazy. But it just might be a lunatic you’re looking for in an airline CEO. —Billy Joel, paraphrased.
Relative elasticities determine the optimal price and quantity, so he’s not wrong. A full plane is not necessarily the optimum, especially when accounting for there being multiple markets on each flight.
But what he might be doing is—
(1) signaling to his managers what he wants to happen even if he can’t (or won’t) force it.
(2) signaling to his competitors what he wants them to do.
(3) signaling to the market what it should expect.
Etc.
“Kirby wants and needs higher fares as UA’s growth has to slow”
Slower growth = higher yields as DL has shown. UA, DL & other airlines will grow according to their market opportunities and profitability. UA has 36 new gates coming online in IAD & IAH and they are winning DEN & ORD financially which is all that matters in the medium to long term. More capacity will come out of the system from the weaker players than from the strong. UA will continue gaining share domestically and widening the gap internationally as they have the best international gateways, network and wide body deliveries. Then there are all the opportunities with the credit cards and loyalty that will be turbocharged with the JFK-SFO/LAX transcons in 2027. UA is hitting on all cylinders and couldn’t be in a better position for success.
you contradict yourself, as usual.
UA has invested a whole lot in growth that simply cannot and will not happen at current fuel prices that won’t come down.
UA was able to grow because other airlines weren’t willing to flood the market with low fares. DL managed to keep enough capacity in the market to become the largest domestic carrier by RPMs. DL does not have any strategic holes that it needs to plug other than connections over Texas, far less than any other carrier has in strategic “needs”
UA will simply find it much harder to grow. The big 4 are all here to stay and will defend their turfs.
F9 doesn’t appear to be backing down and they are the only carrier that has a large overlap with UA.
DL will benefit more from NK’s demise and B6′ network restructuring than any other airline.
@OF1944 — Yeah, @Mantis is actually onto something here. It is collusion. It should be illegal.
One can get empty seats and high fares: it’s the monopoly model. Capture the high paying customers under the demand curve and ignore the rest. Of course, airlines are not a monopoly. But signaling that you will keep airfares high “for the benefit of the whole industry” is a way to nudge competitors toward an informal cartel of setting higher prices without actual coordination. Combined with a threat of retaliatory pricing in case of deviation from the agreed upon price (as in a repeated game in game theory) and you have a sustained equilibrium of higher prices and empty seats.