United Airlines CEO Scott Kirby blames high fuel prices for unprecedented increases in airfares. That’s a new tune for Kirby who argued for a doubling of airfares even in 2018.
Airfares increased 18% in April, the biggest increase for a month since the government began tracking this nearly 60 years ago. Fuel prices, though, aren’t the reason why.
"…in the short-term. So we are planning for this to be the new normal."
So fares are going to stay elevated?
"Certainly if that forecast of jet fuel prices is correct, I expect fares — this will be the new normal for fares."
Scott Kirby interview with @BloombergTV today.
— Ross Feinstein (@RossFeinstein) June 21, 2022
Today’s high airfares are not actually the result of high fuel prices. Airfares are the result of supply and demand.
Airlines don’t just decide to charge more because of high fuel prices. Instead, they pull back on capacity. Marginal routes and flights don’t run because they can’t make money at their higher cost to operate. So passengers don’t get those marginal seats that are sold less expensive, it’s only the higher cost seats purchased by passengers that are willing to pay more that fly.
So are airlines cutting back on flights because fuel prices are too high? No. They’ve been adding flights as fast as they can, but there are still fewer flights and seats scheduled this month than in June 2019. That’s not because of fuel prices.
- Hotel prices are up too and while oil prices do matter to hotels (for their energy costs) no one would argue that’s why hotel prices are up.
- Demand is up having mostly recovered (though not all types of demand, and not in all markets – more leisure, less business, and more spread out across days).
- Supply hasn’t recovered in the same way (fuel contributes but isn’t the binding constraint on supply right now).
Several airlines are limiting their schedules because they aren’t able to reliably operate. Airlines want to fly more – even at current fuel prices – but don’t have the employees to execute those flights. They would increase the number of flights and seats, lowering airfares, if they could – even at today’s fuel prices. Take for instance JetBlue which Most recently JetBlue reduced its summer schedule 10% after operational meltdowns.
Airlines don’t have the planes or people they had before the pandemic. Taxpayers gave airlines over $50 billion in direct payments, and another half that in subsidized loans, plus airlines benefited from reduced taxes and payments to contractors and airports. And this was sold as being to keep everyone employed at airlines so that airlines would be ready to fly when passengers returned. That didn’t happen. Airlines shed employees wherever they could. For instance,
- Delta reduced its workforce by more than 30% – nearly 29,000 employees.
- American fired 30% of its management staff (and when they got the second round of payroll subsidies they actively worked to avoid bringing those people back).
- Airlines offered early retirement incentives and buy out packages to reduce headcount.
American Airlines also retired its Airbus A330s, Boeing 757s, Boeing 767s, and Embraer E-190 fleets during the pandemic. That reduced the seats they can sell (though American squeezed more seats into 737s and Airbus A321s). Delta retired Boeing 777s and older portions of several fleets. Boeing has faced regulatory challenges that have delayed the delivery of new aircraft.
Fewer employees and fewer planes are constraining supply. Fuel is up but isn’t the reason there are fewer seats in the market. So we have an increase in passengers chasing not enough seats and tthatt yields higher prices.
As airlines grow and train their staff, and bring more aircraft on board, they may face a point of deciding to operating fewer flights than they could because of high fuel costs. But that’s not the world we live in today.
As high as prices are, there are bargains out there – you just have to be flexible on your destination. (I realize business can’t do that.) And I’m seeing prices soften for fall travel to vacation destinations I’m monitoring – which means people are starting to shy away from booking trips as they have to pay more for everyday items. Haven’t seen hotels soften much, but I expect they will, which is why I’m holding off on booking.
Fuel prices are indeed PART of the reason for high fares. United is paying the highest system price for jet fuel this quarter – and perhaps for some time into the future – because it is the largest carrier in the NE that does not have active fuel cost reduction strategies. UA’s fuel costs per gallon are in line with B6 which also is at the mercy of significant refined fuel imbalances in the NE, the result of the closure of multiple refineries and the lack of approval of new pipelines and the Jones Act which could help bring more fuel from other parts of the US to the NE. DL’s refinery strategy is intended to directly address both of those issues which is why DL has a 35-40 cent/gallon fuel cost advantage on a system basis – which probably means more than $1/gallon in the NE.
Supply and demand imbalances for airline seats is also PART of the problem. You can’t accurately dismiss any cause.
It is surprising that UA execs were willing to make any comments about future pricing which is considered taboo by the DOJ because it could indicate price signaling.
Bidens failures are reverberating across everything.
They say Anything to cover Their Greed
@Donald
Airlines are still losing money. There is no greed. It’s just keeping up with the Biden stagflation.
Gary, in the short term, prices are high because of supply and demand for flights. In the long term, low prices for flights combined with high prices for supply (both fuel and labor) will lead to industry downsizing (including through bankruptcy), which will lead to higher prices. These current higher prices enable the airlines to continue to operate at the current capacity. In periods of low demand, one might see lower prices in an attempt to gain market share, only until they can reduce supply. Routes which are unable to pay for at least the marginal cost to operate the flight will be cancelled (in aggregate and also including repositioning). In the short term, it’s hard to reduce depreciation costs or to lay off employee,, so a seasonal loss may be acceptable if the entire year is profitable. But to say fuel fuel prices are disconnected to fares is disingenuous at worst, and true only in the short term at best.
Gary, stick to law, not economics, as the latter is definitely not your area of expertise.
Fuel prices have nearly doubled in the last 18 months and everything we do and use involves fuel — movement of raw materials, energy to convert raw materials to finished goods (such as the seats American added to their planes), energy to transport finished goods to market, energy to run ground ops, energy needed to manufacture and transport consumables like food and beverages, and many more. These increased fuel costs get passed on to the airlines in the form of higher costs and over time must contribute to higher fares. Additionally the higher fuel costs experienced by employees will increase labor costs as wages must cover the costs incurred by employees when getting to and from their work; if wages at the airline do not cover this they will seek employment elsewhere so there is pressure to keep wages at a point to ensure retention of desired employees. And of course the dramatically higher cost of each gallon of jet fuel must over time be passed along to the consumer. So wishcast all like but there is no way to decouple our current shocking fuel price inflation — and all other shocking inflation — from dramatically rising airline ticket costs.
It takes a lotta fuel to get some of our passengers off the ground! How about a fat tax?
I think airline ticket prices have increased because C-suite executives believe they deserve a few more millions of dollar equivalents added to their paychecks and retirement plans.
@Koggerj. Waving your MAGA flag won’t change a thing. What was your logic when Nixon was president and inflation was out of control? Were you even alive then? The “Nixon Shock” policies were disastrous. I’ll take a rational and sane Biden over a delusional and dangerous Trump anytime.
“Today’s high airfares are not actually the result of high fuel prices. Airfares are the result of supply and demand.
Airlines don’t just decide to charge more because of high fuel prices. Instead, they pull back on capacity. Marginal routes and flights don’t run because they can’t make money at their higher cost to operate.”
@Gary you talked yourself in a circle. If airfares are a result of supply and demand, and if airlines pulled back on capacity because of the higher fuel prices (your words), then the higher fuel prices did play a role in the higher air fares
@Eric but airlines pulled back capacity due to lack of staffing, not fuel. Even at current fuel prices they want to supply more seats than they currently do.
@Ken A: Well said. Many readers and I agreed completely.
Economics 101…..
US airlines received government funds in 2020 to subsidize/encourage retention of their employees during the first year of the pandemic. Instead most airlines retired less-efficient equipment in their fleet and encouraged early retirement of employees. At the time this was a logical approach and they didn’t plan on the industry bouncing back as quickly as it did. As Gary indicates, the current capacity bottle-neck is on account of lack of staff and has little to do with fuel costs, which were likely hedged long before the Russian invasion.
One other factor is how much capacity airlines made available in the market only to pull back with little to no notice. Had airlines been honest with what they could realistically operate from the get-go the airfare increase wouldn’t have spiked literally overnight.
Airlines presented X supply in the market and the market (demand) already purchased most of the X supply but the lower Y supply was truly available. This creates a reverse bullwhip effect in the supply chain. Airlines have to reaccommodate thousands, if not millions, of customers on different flights and what remaining inventory they had dried up creating an immediate supply scarcity which led to a significant pricing spike rather than a steady increase due to macro-economic factors.
They had adequate demand in the market and behaved like they could support (supply) that demand until the last minute and I will venture to say they knew this was going to happen for months before Russia invaded Ukraine. Anyone who can do basic capacity analysis would have seen this from a mile away. Oil price is only one piece of the pie and Kirby is behaving like its 80% of the pie knowing that the decisions the industry executives made in the past 2-3 years are the primary drivers in this situation.
Another Failure by the Biden Regime
Nice analysis.
I would far rather that Gary discuss these types of stories than a million one off anomalies and try to turn them into trends.
only 2 large jet US airlines hedge fuel to any significant degree – Alaska and Southwest. Delta has its refinery and it is getting about 1/2 of the systemwide benefit as WN in lower fuel costs while AS and DL are paying about the same for fuel. Most airlines are paying significantly more for fuel and passing along those costs to consumers. It is only because there is strong demand that fuel prices can be passed along.
While there are acute staff shortages, the ATC system cannot handle more capacity in many markets. Right now there are ATC delays throughout the NE and not all even involve weather which happens all the time.
and let’s not forget that there is a huge amount of ‘revenge travel’ from people that have been couped up for 2 years and want to get out, esp. for international travel. But Labor Day is coming, demand will fall off, fuel prices will remain high, inflation is eating away at consumer buying power faster than wages are rising, and most economists believe there is a recession coming if we are not in it already. It makes little sense to throw a bunch of capacity into the system to meet a huge amount of pent up demand this summer only to have to discount it heavily to fill it later this year and beyond.
Let’s keep in mind that airlines took on debt to survive covid and need to pay that down and several airlines including JetBlue and Spirit are not expected to make money this quarter (which ends next week) and may not make money all summer. Some airlines including American are expected to burn net cash this year including their debt repayments. The airline industry is far from wallowing in excess profits.
@Alan
Any dumbshit would blame Biden.
All I know is I make regular commute from DAY to SAN and last September I paid about $410 RT, now you cannot touch that same trip for under $1000. same route same plan same airline. Seen some prices up as high as $1300, his is for coach, not extend not anything.
I know absolutely this is NOT from fuel. Besides the Gov’t giving billions to the airlines to keep them alive, now its payback for the airline. Best they are doing to screw the customers even more. If their so short staff, hire who you need, increase wages, best time to increase wages is when everything else is going up.
Its not going to get any better in the Fall either.
Did you know eating medium rare cooked meat is a SIN?
@Koggerj
You truly are an idiot along with Alan !!!!
The President doesn’t control gas prices its a globally traded commodity any third grader could explain it to you !!!
It is precisely because fuel is a global commodity that US-specific strategies to reduce fuel prices won’t work including rebating or removing gas taxes.
And in other United news, they have agreed to drop about 50 flights/day from Newark and apparenty the FAA has agreed to not allow other carriers to fly at those times in order to try to reduce congestion and delays at the US’ most delay-prone airport.
Of course less capacity will mean some fares will go up – likely to cities served by regional jets. UA and Republic are cancelling about 5% of EWR flights daily right now. UA also is increasing pressure to gain more slots at JFK since the NYC competitive balance shifts a bit in Delta’s favor as EWR flights are reduced.
Gary – I don’t find these comments convincing:
“Airlines don’t just decide to charge more because of high fuel prices. Instead, they pull back on capacity. Marginal routes and flights don’t run because they can’t make money at their higher cost to operate. So passengers don’t get those marginal seats that are sold less expensive, it’s only the higher cost seats purchased by passengers that are willing to pay more that fly.”
“As airlines grow and train their staff, and bring more aircraft on board, they may face a point of deciding to operating fewer flights than they could because of high fuel costs. But that’s not the world we live in today.”
Airlines HISTORICALLY cut capacity when fuel prices rose because they didn’t believe they COULD raise prices to offset the increase in fuel.
However, in today’s world, airlines have enjoyed the ABILITY to pass on higher fuel costs to customers.
Regarding your last comments, airlines will ABSOLUTELY attempt to pass on higher fuel prices to customers even if they are fully staffed. If they are successful, they will not only operate current schedules, they will add more flights.
You have to get out of the mindset that customers can’t absorb price increases. In some cases, they can.
Anthony,
we are living in a post-covid world where an enormous number of people are traveling because they have not felt safe to travel for 2 years or because it was extraordinarily difficult.
That level of demand will not last forever.
Pricing will soften considerably after the summer unless a lot of demand comes out of the US airline system.
Add in a recession and near double digit inflation and the pool of discretionary income will dry up real quick.
Thank you Mr. Tim Dunn for your detailed, factual and (most important) attack free posts. You make reading the comments enjoyable. I like to learned new things from this blog and love honest debate but too many times the comments devolve into name calling diatribes. It is most depressing. I thought, silly me, after lock downs and mask requirements ended that things would “settle down” but sadly, no. Thank you for helping me to learn things without vitriol. The last six years have been horror filled for me. I fear for the future of this country…..
@ Gary and others
FWIW, and accepting this relates to an Australian not a US-based airline, please note the following quote from the Qantas Group Market Update” issued by Qantas Corporate Sales:
“The Qantas Group is adjusting its domestic capacity levels to assist with the recovery of sustained high fuel prices. It will bring the Group’s planned domestic flying down to 106 per cent of pre-COVID levels in late 2022, and 110 per cent in early 2023.
These reductions, combined with high travel demand, are expected to help the Group recover the elevated cost of fuel. They will also assist with the resourcing pressures currently being felt across aviation and the broader economy.
Capacity is being reduced from high frequency routes, so the impact to customers is expected to be minimal.”
So…airlines can and do reduce overall capacity in response to elevated fuel prices whilst still attempting to address the upsurge in demand. It’s just a question of which airline you’re talking about at the time.
Well platy, it makes sense. Why do something 10 times when you can do it 5 times for the same revenue?
Then you save yourself effort which is great because you only have enough energy to do it 7 times?
Now you have some slack built in.
Gary is going to roast me but I lament what has happened to ABIA
(Austin). The poo baas keep adding flights beyond it’s capacity, ruining the experience for everyone. Waiting outside the front door of the terminal in a line for security check in 100 degree heat!!?? Someone not tethered by greed needs to speak up and say “no, this place can handle Y number of flights and not one more!.
Overwhelming demand? The price of tickets go up, everyone makes more money using less resources and their employees aren’t so overburdened they quit. You present a schedule to pax with confidence which is great because pax may grumble “so expensive!” but more importantly they can have confidence they will get where they want to go. Austin should build another airport instead of tearing up ABIA (think of the disruption-it’s already too crowded and then add construction!!??) while breaking their word to leaseholders. Yes Gary, I know ABIA would be, as you say, “adding value in the margjns” (very valuable!) but at what cost to comfort and resource allocation plus going back on your word? Oh, it’s legal, that makes it OK! No it doesn’t.
I just wish airlines would have taken a long view this summer (all corporations actually) instead of a (cash grab now!) greedy plan with minimal slack. Now everyone’sunhappy.. Sorry, I worry about things above my pay grade. Let me go back to barking at the moon and chasing clouds…..
@ JorgeGeorge Paez
So what’s the latest at ABIA? Have they kicked out the tenants from the South Terminal yet so they can expand?
Yeah – I hear you on the issue of overload – the problem with a simplistic “economic” analysis is that it can fail to take into account the customer (behaviour / experience / expectation, etc.,) and the human capital of the employees (understaffed, overworked, undertrained, etc). Profit before people. You may get a short term financial gain but at an unknown cost and thereby unpredictable negative impact later.
You’re not alone at barking at the moon!
But, as customers, maybe we all need to do is a little bit more foot stamping so the greedy clowns don’t push the boundaries to unreasonable limits.
Platy: for now it’s quiet at the ABIA corral, save for the varmint lawyers circling each other in tense anticipation of billable hours, pens drawn, legal briefs bursting with actionable items at the ready.
They hover like vultures salivating in anticipation of the coming plunder, awaiting the politicos as they run their focus groups, take donations to see who is really interested/has skin in the game and point their common avian beaks into the wind to see which way it is blowing. I am assured behind the scenes certified letters are flowing fast and furious,
Seriously, we don’t have principled leaders anymore (this is what I believe to be the “right thing,” not going back on our word that was clearly stated in a contract we agreed to). We have poll takers and grifters for leaders, which, sadly, means we have NO leaders at all.
Meanwhile, the buzzard lawyers circle. They have all day.
Why not?
They’re getting paid by the hour…..