Airfares are falling as the peak summer travel season fades. Now what?

Passengers are seen at Delta Air Lines check-in counters at Hartsfield-Jackson Atlanta International Airport ahead of the July 4 holiday in Atlanta, Georgia on July 1, 2022.

Elie Nouvelage | Reuters

Believe it or not, flights are getting cheaper and cheaper.

Airfares fell 1.8% seasonally adjusted from May to June, according to the latest US inflation data released last week. Fares were one of the few categories to fall at a time when consumer prices rose at the fastest rate in more than four decades.

A surge in spring and summer travel – even at exorbitant prices – has been a boon for airlines, generating revenue above 2019 levels even as airlines fly less than before the pandemic, reports show. recent releases from major carriers like Delta Air Lines and American Airlines.

Now the question is: how resilient will demand be after the summer peak as carriers and travelers grapple with lingering inflation and worry about an economic slowdown?

Delta CEOs at JPMorgan said last week that consumers continue to spend voraciously on travel. But rising costs may affect household vacation budgets and companies’ appetite for sending employees on business trips.

Rising costs are already weighing on airline bottom lines and high fares are forcing some travelers to change their plans.

Ben Merens, a 62-year-old communications consultant, said he and his wife had canceled their summer vacation plans due to a family emergency just before the July 4 weekend.

The couple had been aiming for a trip to Denver or Seattle, but not going after a death in the family meant last-minute tickets from their home in Milwaukee to New York to attend the funeral – which Merens said was on the way. item $980 each.

“The price is exorbitant,” Merens said before their flight home from New York’s LaGuardia Airport.

Fewer flights, more revenue

Ticket prices often drop when the peak summer travel season wanes – children return to school and families wrap up vacations, though business travel often picks up. Airlines are also adjusting their capacity for periods of low demand so as not to flood the market with seats they would have to offer at low prices to be filled.

Round-trip flights to the United States as of July 14 averaged $375, down from a peak of $413 in May, but still up 13% from 2019, according to the fare tracker Hopper.

Airlines were nonetheless optimistic about future sales, citing pent-up desire to travel by business travelers and holidaymakers.

“People haven’t had access to our product for almost two years,” Delta CEO Ed Bastian said during the company’s quarterly earnings call last week. “We’re not going to satisfy…that thirst, in a space of a busy summer period.”

Delta posted a profit of $735 million in the second quarter on revenue of $13.82 billion, a 10% increase in sales compared to the same period of 2019. The airline said that domestic business travel sales, lagging for much of the industry’s recovery, jumped to 80% of 2019 levels.

Delta projects more muted revenue growth for the third quarter, however. The carrier expects revenue to grow 1% to 5% from 2019 levels and said it will limit schedule growth through the end of the year – a move that could in turn keep fares high if high demand for seats from travelers continues.

“We also recognize that our crystal ball is only about three to four months away right now and it’s not going as far as people would like us to think,” Bastian said. “But everything we see tells us that we must flee.”

American and United Airlines were also bullish and are expected to report second-quarter results and provide investors with outlook on Wednesday and Thursday, respectively. American on Monday forecast second-quarter revenue growth of 22.5% from 2019 for the three months ended June 30, up from its previous estimate of a 20% increase, on a slightly longer timeline. short.

Smoothing operations

Still, airlines will have to navigate the cracks of the scorching labor market and worries about economic weakness as the peak travel season fades.

“Going into the fall, the impact of cost inflation on the incomes and discretionary budgets of consumers and business travelers could lead to weaker overall demand for air travel,” Jonathan wrote last month. Root, transportation analyst at Moody’s Investors Service. “However, current capacity constraints would prevent airlines from having too much capacity, should that happen.”

US airlines have cut their schedules significantly after biting off more than they could chew this spring and summer. Many carriers sold schedules to passengers only to limit later flights as staff shortages and other challenges prompted them to call back.

Delta, American, United, JetBlue Airways, Spirit Airlines and Alaska Airlines have each limited their flights.

The seasonal drop in flights could help airlines improve operations and provide more leeway to train their thousands of new workers without the hordes of summer.

Delta’s Bastian said the carrier has hired 18,000 people since the start of 2021, roughly matching the number it lost during the pandemic when it urged staff to take buyouts.

“While we have over 95% of the employees needed to fully restore capacity, we have thousands in one phase of the hiring and training process,” Bastian said on the company’s quarterly call.

Southwest Airlines, for its part, said this week it has hired 10,000 people since January to bring its workforce to 61,000, more than in 2019.

Elizabeth Bryant, senior vice president of human resources, learning and development at Southwest, added that “hiring and training will remain a priority throughout 2022.”

Smoother operations could ease travelers’ concerns about delays and disruptions and keep demand high. But in the meantime, flying less means higher costs, which are often passed on to consumers.

“We are largely bearing the full cost of the airline with only 85% of our flights restored,” Bastian said.

With high demand, airlines can still charge relatively high fares – the reverse is true, which is why there were so many bargains at the start of the pandemic when most would-be travelers stayed home.

Additionally, a decline in consumer spending or a slowdown in the labor market could lead to lower fares and airline revenues.

“Right now people just have money to spend,” said Adam Thompson, founder of Lagniappe Aviation, a consulting firm. “Once people have run out of money to spend, you have to convince them that they want to buy your product.”

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