Passengers are seen at the Delta Air Lines check-in counter at Hartsfield-Jackson Atlanta International Airport on July 1, 2022, before the Fourth of July holiday in Atlanta, Georgia, July 1, 2022.
Elijah Newgezh | Reuters
Flights, believe it or not, are getting cheaper.
Air fares fell a seasonally adjusted 1.8% from May to June, according to the latest US inflation data released last week. Ticket prices were one of the few categories to decline at a time when consumer prices rose faster than they had in more than four decades.
According to recent reports from major carriers such as Delta Air Lines, an increase in spring and summer travel — even at very high prices — has been a boon for airlines. and American Airlines.
The question now is: How sustainable will demand be after the summer peak as carriers and travelers grapple with persistent inflation and fears of an economic downturn?
The CEOs of Delta and JPMorgan said last week that consumers continue to spend wildly on travel. But rising costs may affect household vacation budgets and companies’ willingness to send employees on business trips.
The jump in costs is already affecting airline revenues, with high fares forcing some travelers to change their plans.
Ben Merrens, a 62-year-old communications consultant, said he and his wife canceled their summer vacation plans because of a family emergency just before the Fourth of July weekend.
The couple had planned to take a trip to Denver or Seattle, but they don’t go after a death in the family, which meant last-minute tickets from their home in Milwaukee to New York to attend the funeral, Merens said. $980 each.
“The price is prohibitive,” Merens said before their return flight from New York’s LaGuardia Airport.
Fewer flights, more revenue
Fares often fall when the summer travel season winds down — kids go back to school and families finish their vacations — though business travel often picks up. Airlines also adjust capacity for periods of lower demand so as not to flood the market with seats they should be offering at low prices.
U.S. round-trip flights averaged $375 as of July 14, down from a peak of $413 in May, but still up 13% from 2019, according to price tracker Hopper.
However, airlines are optimistic about future sales, citing a dampened desire to travel by corporate and leisure travelers.
“People haven’t had access to our product for two years,” Delta CEO Ed Bastian said during the company’s quarterly earnings call last week. “We won’t satisfy…that thirst during the busy summer period.”
Delta posted a profit of $735 million in the second quarter on revenue of $13.82 billion, up 10% from the same period in 2019. The airline said domestic corporate travel sales, which have largely lagged behind the industry’s recovery, rose 80%. from 2019 levels.
Delta is projected more off revenue growth in the third quarter. The carrier expects revenue to rise 1% to 5% from 2019 levels and said it will limit growth in its flight schedule until the end of the year, a move that could in turn keep prices elevated if traveler demand for seats continues.
“We also recognize that our crystal ball is only about three to four months old right now, and it doesn’t go as far as people would like us to think,” Bastian said. “But everything we see tells us we have to run.”
American and United Airlines have also been bullish, and are due to report second-quarter results and provide investors with forecasts on Wednesday and Thursday, respectively. American on Monday forecast second-quarter revenue growth of 22.5% compared to the three months ended June 30, 2019, compared with a previous estimate of 20% growth on a slightly slower schedule.
However, airlines will have to navigate cracks in a hot labor market and fears of economic weakness as the peak travel season fades.
“In the fall, the impact of cost inflation on the discretionary income and budgets of consumers and corporate travelers may dampen overall demand for air travel,” Moody’s Investors Service transportation analyst Jonathan Root wrote last month. “However, current capacity restrictions would protect airlines from overcapacity if this were to happen.”
U.S. airlines have largely cut schedules after biting off more than they could chew this spring and summer. Many carriers sold flight schedules to passengers only to later curtail flights as staff shortages and other issues forced them to call back.
Delta, American, United, JetBlue Airways, Spirit Airlines and Alaska Airlines each restricted flights.
A seasonal decline in flights could help airlines improve operations and offer more breathing room to train thousands of new hires without the summer glut.
Delta’s Bastian said the carrier has hired 18,000 people since the start of 2021, roughly the number it lost during the pandemic when it prompted employee buyouts.
“While we have more than 95% of the employees needed to fully restore capacity, we have thousands of employees at some point in the hiring and training process,” Bastian said on the company’s quarterly call.
Southwest Airlines, meanwhile, announced this week that it has hired 10,000 people since January to bring its workforce to 61,000, up from 2019.
Elizabeth Bryant, Southwest’s senior vice president of people, learning and development, added that “employment and training will remain a key focus throughout 2022.”
Smoother operations could ease travelers’ concerns about delays and disruptions and keep demand high. But for now, flying less means higher costs, which are often passed on to consumers.
“We cover most of the airline’s costs, and only 85% of our flights have been restored,” Bastian said.
Because demand is strong, airlines can still charge relatively high prices — the opposite of why there were so many deals 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 reduce ticket prices and airline revenues.
“People just have money to burn right now,” said Adam Thompson, founder of consultancy Lagniappe Aviation. “When people have no more money to burn, you have to convince them that they want to buy your product.”