Airfares are finally starting to cool as peak summer travel season fades. Now what?
- Air travel demand has surged despite an uptick in fares.
- Some travelers are rethinking their travel plans as inflation rises.
- Business travel generally picks up after the summer travel season, but the outlook is still uncertain.
Flights, believe it or not, are getting cheaper.
Airfares fell a seasonally-adjusted 1.8% from May to June, according to the latest U.S. inflation data, published last week. Fares were one of the few categories to decline at a time when consumer prices rose at the fastest clip in more than four decades.
The surge in spring and summer travel — even at sky-high prices — has been a boon to airlines, driving revenue above 2019 levels even as airlines fly less than they did before the pandemic, according to recent reports 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 alike grapple with persistent inflation and worries about an economic slowdown?
CEOs from Delta to JPMorgan last week said consumers continue to spend voraciously on travel. But rising costs can affect household vacation budgets and companies' appetite to send employees out on business trips.
A jump in costs is already weighing on airlines' 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 called off their summer vacation plans because of a family emergency that happened just before Fourth of July weekend.
The couple had their sights set on a trip to either Denver or Seattle, but aren't going after a death in the family meant last-minute tickets from their home in Milwaukee to New York City to attend the funeral — which Merens said were about $980 apiece.
"The price is exorbitant," Merens said before their return flight from New York's LaGuardia Airport.
Less flying, more revenue
Ticket prices often dip when the peak summer travel season fades — children return to school and families wrap up vacations, though business travel often ramps back up. Airlines also adjust capacity for lower-demand periods so they aren't flooding the market with seats they would need to offer at low fares to fill.
U.S. roundtrip flights as of July 14 averaged $375, down from a May peak of $413 but still up 13% from 2019, according to fare-tracker Hopper.
Airlines have nonetheless been upbeat about future sales, citing the pent-up desire to travel from both businesses and leisure travelers.
"People have not had access to our product for the better part of 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 $735 million profit in the second quarter on $13.82 billion in revenue, a 10% sales increase from the same period of 2019. The airline said domestic corporate-travel sales, a laggard for much of the industry's recovery, surged to 80% of 2019 levels.
Delta is projecting more muted revenue growth for the third-quarter, though. The carrier expects revenue to increase by 1% to 5% over 2019 levels, and said it will limit its schedule growth through year-end — a measure that could in turn keep fares elevated if travelers' fierce demand for seats continues.
"We also acknowledge that our crystal ball is only about three to four months right now and it doesn't go all the way as far as people would like us to think," Bastian said. "But everything we see tells us that we've got to run."
American and United Airlines have also been upbeat and are due to report second-quarter results and provide outlooks to investors on Wednesday and Thursday, respectively. American on Monday forecast second-quarter revenue growth of 22.5% over 2019 for the three months ended June 30, up from its previous estimate for an increase of 20%, on a slightly smaller schedule.
Smoothing operations
Still, airlines will have to navigate cracks in the red-hot job market and concerns about economic weakness as the peak travel season fades.
"Come the fall, the impact of cost inflation on consumers' and corporate travelers' discretionary income and budgets could lead to softening aggregate demand for air travel," wrote Moody's Investors Service transportation analyst Jonathan Root last month. "However, the current capacity constraints would protect the airlines from having too much capacity, should this occur."
U.S. airlines have largely trimmed schedules after biting off more they could chew this spring and summer. Many carriers sold schedules to passengers only to curb flying later as staffing shortages and other challenges prompted them to dial back.
Delta, American, United, JetBlue Airways, Spirit Airlines and Alaska Airlines each capped flying.
The seasonal decline in flights could help airlines improve operations and offer more breathing room to train their thousands of new workers without the hoards of summer.
Delta's Bastian said the carrier has hired 18,000 people since the start of 2021, which is around 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 some phase of hiring and training process," Bastian said on the company's quarterly call.
Southwest Airlines, for its part, said this week it hired 10,000 people since January to bring its employee base to 61,000, more than during 2019.
Elizabeth Bryant, Southwest's senior vice president of people, learning and development, added "hiring and training will remain a focus throughout 2022."
Smoother operations could ease traveler concerns over delays and disruptions and keep demand high. But in the interim, flying less means higher costs, which are often passed along to consumers.
"We are largely carrying the full cost of the airline with only 85% of our flying restored," Bastian said.
With demand strong, airlines can still charge relatively high fares — the reverse is true, which is why there were so many bargains early in the pandemic when most potential travelers stayed home.
In addition, a decline in consumer spending or a downturn in the labor market could drive fares and airline revenue lower.
"Right now people just have money to burn," said Adam Thompson, founder of Lagniappe Aviation, a consulting firm. "Once people no longer have money to burn, you have to convince them they want to buy your product."