Airfares are going up. Blame full planes, not fuel prices

The prices of jet fuel are soaring along with the cost of other fuels. The same goes for airline tickets.

Blame it back on passenger demand – instead of fuel prices – if you pay more for a flight this spring or summer.

The country’s top airlines executives appeared at a JPMorgan investor conference on Tuesday and all talked about much higher demand for air travel than they had just expected months ago. Delta and American both said they had record days for passenger bookings last week.

“We are seeing an increase in demand that is truly unprecedented,” said Delta president Glen Hauenstein. “I have never seen … demand activate as fast as after Omicron.”

Rising demand is raising fares by about $ 15 to $ 20 on a $ 200 ticket in the second quarter of this year. This represents an increase of about 8% to 10% over what Delta had previously planned for fare charges.

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“It was really the strong demand and the best price environment … (that allowed us to offset the cost of fuel more,” Hauenstein said.

Fuel is the second largest cost for airlines, after labor costs, which accounts for 20% to 25% of operating costs. With the exception of Southwest, most carriers do not have long-term fuel contracts, known as fuel barriers, to protect them from fuel price spikes.

The three largest US airlines – American, United and Delta – warned investors on Tuesday that the average price for a gallon of aircraft fuel would jump between 17% and 33% in the current quarter compared to the last three months. 2021 and between 47% and 72% compared to those who paid a year ago.

The last two years have shown that airlines can not just raise fares to cover costs, as the US aviation industry has collectively lost tens of billions of dollars as demand for air travel has plummeted. Although demand for leisure travel resumed last summer, U.S. airlines reported all losses for the year.

This year’s demand should be enough to get the industry back to profitability for the first time since 2019, as the increase in passengers allows airlines to raise ticket prices.

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However, rising aircraft fuel costs will put pressure on carriers’ results, said Philip Baggaley, chief credit analyst for Standard & Poor’s.

“Even with this heavy traffic, airlines can not recover all the higher fuel costs, especially if they go up fast,” he said.

Airlines began raising fares long before the war in Ukraine pushed oil prices higher. They saw strong bookings in early 2022 as the Omicron variant receded and decided that there was enough demand to support fare increases.

“When you think of pricing, it’s more a function of what customers will pay for,” said Tammy Romo, chief financial officer of Southwest. Despite lower costs than its long-term fuel contracts, Southwest introduced a nationwide tariff increase on February 1, weeks before Russia’s invasion of Ukraine sent fuel prices soaring.

Airlines also reduced the number of cheaper seats earlier in the year, in anticipation of strong summer bookings.

“We did not pre-sell at lower fares this summer, we saved the seats and now we are selling them at much higher prices (fares) and we are happy about that,” said Andrew Nocella, chief marketing officer of United.

Most airlines still operate fewer domestic flights than before the pandemic. Staff shortages and some delays in the delivery of new aircraft mean that airlines offer less capacity than the market could otherwise bring.

“We already have planes that are full as of March 2019,” said Willis Orlando, senior flight specialist for Scott’s Cheap Flights, a booking site.

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The consumer price index shows that airfare increased by about 13% in February compared to a year ago, but is still down 16% from where it was in February 2020, before the pandemic decimated demand for air travel. .

One reason that fares have not returned to pre-pandemic levels is that while domestic leisure travel is close to where it was in 2019, business travel and much of international travel, two of the most lucrative segments, are far from full recovery. .

“Restriction on business travel is not Covid’s fear. Restriction on business travel is that people do not return to the office,” said Doug Parker, CEO of American Airlines. “As people return to the offices, he returns quickly.”

As Covid-related restrictions are lifted, international travel could approach 2019 levels by the end of the year, he added.

“There is a huge limited demand for international travel,” Parker said. “When will every country say it’s okay to travel without Covid restrictions? I can not say that. It will not be this summer. But I definitely think it will be done by the end of the year.”

Airfares are going up. Blame full planes, not fuel prices Source link Airfares are going up. Blame full planes, not fuel prices

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