The reasons most pundits give for high airfares right now are usually wrong. Travel hasn’t fully returned to 2019 levels, so why have prices risen so much? Fuel prices can limit which flights operate profitably, but fuel isn’t the current binding constraint on supply. And it’s not just a desire of airlines to make back the money they lost during the pandemic.
Instead it’s something far more nefarious.
- “Travel is back” but travel isn’t at levels greater than 2019, and the highest-fare travel (business travel) isn’t fully back. So this doesn’t explain the nominal price level of airfares, although note that it may make sense to inflation-adjust and real prices may not have moved as much as you think.
- “Fuel prices are high” but that alone doesn’t explain pricing. Airlines don’t 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.
- “They’re trying to make back the money they lost during the pandemic” but airlines and hotels tried to make money before the pandemic too, if price was driven by motivation we’d have seen higher prices earlier. This is a silly explanation for today’s pricing.
Fuel prices are given as a reason why airfares are up, but 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.
Instead prices are set by supply and demand.
- Demand has mostly recovered (though not all types of demand, and not in all markets – more leisure, less business, and more spread out across days). And
- Supply hasn’t recovered in the same way (fuel contributes but isn’t the binding constraint on supply right now).
Consider that 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. Most recently JetBlue just reduced its summer schedule 10%.
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.
That’s one of the major issues driving recent unreliability of air travel – not having enough employees to operate the flights.
American didn’t keep its pilots trained and ready, either, and that’s a big reason they were operationally unreliable last summer. American didn’t have the pilots to operate its published schedule (in the fall they lacked the flight attendants, too). Having learned that lesson is one of the reasons the current schedule is less aggressive than it would have been.
Meanwhile American also retired its Airbus A330s, Boeing 757s, Boeing 767s, and Embraer E-190 fleets. 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.
According to data from Cirium’s Diio Mi,
- Scheduled flight departures within the Continental U.S. are down 13% in June 2022, compared to June 2019. That’s nearly 90,000 fewer flights per month.
- Scheduled seats on those flights are down 6%. That’s about 5 million fewer seats a month.
Airlines have fewer workers and fewer planes and so they haven’t managed to return capacity to pre-pandemic levels. That’s the bigger driver of reduced supply than fuel prices right now.
With travel almost back to where it was before the pandemic (restored demand), and fewer seats available (limited supply), you should expect higher prices. Though again temper your sticker shock by adjusting for inflation (with the caveat that maybe inflation has slowed a bit March CPI data notwithstanding.
The best way to fight inflation is to stop feeding it.
Our household has chosen not to fly this summer. When enough people vote with their wallets, prices will go down.
The most corrupt institution in the US (Congress ) gave $54 billion, yes billion $$$ if others peoples money ( could have bought 100% of the eqity of every US airline) to prevent this exact operational meltdown. Has there been any accountability for where the money went? Nope. Will there ever be? Nope. But don’t worry, the FBI is investigating parents at school board meetings.
Seems to me that the aggregate dollars of all the future flight credits are fueling travel for a great many people. They’re travelling, but the airlines aren’t generating revenue … that money has been on the books for more than 2 years. What I don’t understand is why there’s such a lack of staff … what are these people doing for a living; why aren’t they coming back to work?
@Mike – In the mean time, your meaningless gesture will go unrewarded and you will get old and die. Time is a valuable commodity that is always expiring.. But you can substitute for travelling to expensive destinations with cheaper alternatives and destinations. Drive rather than fly. Go to someplace less popular. Look for deals and go there. Get creative.
Example, if I had kids who wanted to go to DisneyWorld for spring break next year, but I didn’t want to pay for airfare to Orlando and the ridiculous prices I would have to pay for the fakery, I could stay home. Or I could fly to the Turks & Caicos and rent a house right now for less than the Disney vacay. I can book that right now from my city, or I could whine about how expensive things have gotten. Kids, you’re going to learn to snorkel, help your parents BBQ, and play board games…
@Mike – not flying won’t bring prices down, it will just decrease flight availability as airlines cancel flights which aren’t full. Fuel is a big part of setting ticket prices, but if there aren’t buyers, flights will be reduced. That doesn’t mean ticket costs well go down. Airlines which can’t generate cash go bankrupt in the ultimate capacity reduction.
@Huey Judy – using flight credit does increase airline revenue, it just doesn’t help with cash flow. Those credits are liabilities, not revenue. Flying a passenger on a credit changes the liability into revenue. They do have to spend cash to buy the fuel and pay the flight attendants, so cash on hand drops when credit is used. But, is not much different than buying future flights, the airline gets your money, but can’t count it as revenue into the ticket is used..
I agree with Mike. I want to go on a cruise (which is relatively inexpensive), but I am not paying $800 per person to fly from Houston to Seattle to get to that cruise. I’m just foregoing this until we get into a recession and prices plummet and they’ll be another bailout…..
Good observation and analysis Gary.
Enough people had enough with all the restrictions. They are “free at last.” And they will spend, no matter the price. Hey, if they have it, go for it. If not, there are plenty of alternatives.
How about prices are up due to being just greedy and because they can charge whatever price ghey want to.
I go to SAN 4 times a year. Last time out $410 RT from DAY. This trip nothing less than $1000. Time in July $780.
Thats well over 100% increase. I do not have a choice. Airlines will continue to gouge their customers until people stop flying which will not hapoen due to pent up demand.
Pretty soon it will ne cheaper to drive the 2000 miles.
The weirdest thing is dirt-cheap airfares to Hawaii but stratospheric hotel prices when you get there.
Supply and demand ! Crazy prices for EWR-PHX for a 5 day vacay. Not gonna do that, so I’ll drive NJ Dayton (9 hours), take my time, overnite at halfway driving point and to Dayton for a few days at the great Museum of the U.S. Air Force. Hotel nights, gas and incidentals comes in at around half the amount to fly, stay & rent a car in PHX / TUC areas. Just have to be flexible these days with destinations.
Many have touted driving as an alternative to flying — but even with the astronomical increases in car gas prices? And also with increasing hotel/food prices along the way to/from vacation destinations?
The intentional infliction of rampant inflation upon our nation might be a better method to keep our populace “locked down” at home, than those totally ineffectual COVID-19 mandates during the past 2+ years!
@JJ – Would you pay $400? AUS-ELP on AA in July is as low as $194, ELP-SEA on Alaska is $238.
Alternatively, Alaska has a nonstop from IAH to SEA for $688. But get an Alaska CC and you get a $99 companion fare ($121 with taxes), so a little cheaper, you don’t have to drive to AUS, and it’s non-stop.
I CAN be done.
@Coolah – You don’t have a choice? Really. Because you can’t drive to CVG or IND or CMH? Because you can’t book in advance? Fares are sub-$400 from those locations in August, I even see a few sub-$300.
“What I don’t understand is why there’s such a lack of staff … what are these people doing for a living; why aren’t they coming back to work?”
Other jobs in other industries. The unemployment rate is very low and the employment to population ratio has been rising very rapidly since bottoming in early 2020. It’s a strong labor market and there are more attractive opportunities.
“How about prices are up due to being just greedy and because they can charge whatever price ghey want to.”
Businesses always price to maximize profits. If they could genuinely get whatever prices they want prices would be higher. Supply and demand. At what point in time did they ever price lower than they could have?
Wow, the US is so much better now. The future is looking so bright. Glad we got that person who tweeted “mean” things out of office.
Every domestic US flight I am on is full, and it has been that way for some time. So I understand supply and demand and why prices have been going up here.
What I have a little harder time understanding is the international flights. I happen to have made some inexpensive TATL RTs in business class earlier in the year, but continue to watch the price on some preferred routes in June and August. Even about 3 weeks out from the trip, the flights are only about half full in business, and 1/3 full in economy/premium economy. Yet the prices have gone up over 50% from early Spring (and on UA, no upgrade space has been made available). I know the airlines may have been expecting a rebound in travel to Europe and to sell those seats at a high price, but the demand does not seem to be showing up in the online available seat charts on the flight booking websites.
@Arthur
I agree and have also been watching a route to Mexico this summer which has been absurdly expensive and the seat maps for all the flights that day show each flight basically empty. The fare is starting to come down slightly and I expect/hope that to continue.
I wonder if part of this is that this is new territory for revenue managers. They’re used to having decades of data and complex algorithms to guide them. As Gary says, the revenue mix now is totally new with business travel off still. Particularly on international routes, maybe they’ve just aimed high and will adjust as needed on fare. I’d say they’d consolidate some frequency too, but with international routes I know that can be complicated sometimes.
@Gary thank you for this. I appreciate the pointer about airlines thinning their fleets and workforces. Makes sense to me, although the post-COVID travel surge I think is real, too.
As you write, it isn’t just costs. AA dumped my wife and I off a Flagship First flight in LAX in February when our FO “ran out of hours” Hallo? Dispatch? Really. A one-way Heretz rental, 7 hr drive and a 0330 arrival home fixed that. (I escaped arrest so I must have won the Hertz lottery)
ANd again DFW last week when I had the creeping cancellation (keep advancing the flight time) so I binned it, booked the next day and went to the Hyatt. Had points would have ben another $400 otherwise.
LOL. Concierge Key service ain’t what it used to be. No calls, no flight options, no nuttin…
The cost to AA is that now I will only fly direct in a lower (cheaper) class of service, I doubt they care.
Most of these comments are variations on Gary’s point (and Adam Smith’s, Augustin Cournot’s, Milton Friedman’s, Robert Samuelson’s, et. al.) that prices are set by supply and demand. We don’t make the rules, we just have to live with them.