Airlines’ high fares fueled by demand, not just cost

(CNN) — The soaring cost of jet fuel due to the war in Iran will lead to significantly higher airfares. But don’t expect ticket prices to drop once fuel prices start to decline.

Higher fares are being driven by strong demand for travel as much as the cost of fuel. Despite higher ticket prices, travelers are booking tickets in record numbers at many airlines. So, as long as passengers keep flying, higher fares are likely to stay in place, no matter the cost of fuel.

“The longer consumers pay these prices and airlines get used to this revenue stream, the more likely it is (to hold),” United CEO Scott Kirby said during its earnings call Wednesday. The airline’s passengers are now paying on average 20% more for every mile they fly compared to last year.

When asked about keeping higher fares when fuel prices normalize, American Airlines CEO Robert Isom said customers have already been willing to pay more for things like extra legroom or seats closer to the front.

“I’m bullish on what that means for our business,” Isom told analysts Thursday.

He said that summer bookings have stayed strong even as the airline raised fares.

“I think that what you’re seeing is recognition that travel is still a good deal,” Isom said.

The price of jet fuel, which has roughly doubled since the start of the year, is a major factor behind the widespread fare increases. Fuel is the second largest operating cost for airlines behind only labor.

The nation’s four largest carriers — United, American, Delta and Southwest — spent on average a combined $100 million a day on fuel last year. And that was during a time of relatively cheap oil and fuel costs.

Today, they’re paying billions more. Delta said it faced $2 billion in increased fuel costs in the current quarter alone.

Airlines are passing some of the cost to consumers. Recent results show they’re already charging passengers 20% more for every mile they fly compared to a year ago, and fares are projected to go higher still.

Southwest Airlines Chief Operating Officer Andrew Watterson told investors Thursday there have already been five industrywide fare hikes so far this year, with more on the way. And all the airlines say they’ve only recovered a portion of their increased costs.

Fares about far more than costs

But fares are not based on the cost of operating a flight, said Zach Griff, author of an airline newsletter, From the Tray Table.

Instead, price is primarily determined by demand — for a certain route, time of day or week and the amount of competition.

For example, midweek or overnight redeye flights are typically cheaper than prime travel times on the same route, such as on Friday afternoon. And passengers often pay far less for every mile traveled on popular long-haul flights between major cities, such as New York and Los Angeles, than on shorter routes with less demand.

Airlines are cutting some of these less profitable flights, which have become money losers amid higher fuel prices. United, for example, has cut its previously planned schedule by about 5% through September. Removing these bargain fares is also lifting the average ticket price.

But with travelers still booking tickets, airlines know they can make higher fares stick on their remaining flights.

“The fare environment will ultimately play out based on market conditions,” Southwest’s Watterson said.

There is also the possibility that Spirit Airlines, a trendsetter in ultra-low fares, could fold under the weight of higher fuel costs.

The budget carrier, which has filed for bankruptcy twice in the last two years, warned in March it could go out of business. The Trump administration has said it’s looking at possibly bailing it out or even buying the airline to keep it afloat. Even if Spirit survives, it will be much smaller. Other discount airlines are struggling as well.

“If you remove low-cost competition from the equation, then, yes I think that United and those airlines could really get away with these higher fares sticking around for a long time,” Griff said.

Whatever investors and analysts might think of airlines’ attempt to hang on to fare hikes even if fuel prices fall, the idea has generated public criticism.

Rep. Ritchie Torres, a Democrat from New York, sent a letter to United’s Kirby following his remarks.

“United is openly planning to pocket a significant share of any fuel savings rather than pass them on to passengers,” Torres wrote. “Everyday Americans, many of whom are already being priced out of air travel, deserve better than this level of corporate greed.”

United declined to comment on Torres’ letter.

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