Airline CEOs warn fare increases will ‘stick’ even if jet fuel costs fall

A traveller passes Air Canada planes at Pearson International Airport in Toronto. Photo by Darren Makowichuk /DARREN MAKOWICHUK/Postmedia

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Several airline executives have indicated that the current high ticket prices may become the new normal, even if cost pressures ease.

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According to recent research by consultancy Teneo, global airfares have risen 24 per cent compared to a year ago, marking the steepest increase for the same period in the past five years.

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On Wednesday, United Airlines EVP and Chief Commercial Officer Andrew Nocella suggested that these elevated prices might be here to stay.

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“The longer consumers pay these prices and airlines get used to this revenue stream, the more likely it is to stick,” he said during the company’s earnings call.

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CEO Scott Kirby added that ticket prices may need ​to rise by as much as 15 to 20 per cent to offset jet fuel costs, per Reuters. He noted that, even as prices rise, the airline has not yet seen a drop in demand — though he acknowledged that higher fares could eventually lead to “less overall demand.”

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United aims to recover 100 per cent of the increase in fuel costs by the end of next year by increasing prices for customers.

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“We believe we have the ability to pass on the increase in fuel due in large part to our brand loyal customers, continued demand strength and preference to fly United even at higher fares,” executive vice president and chief financial officer Michael Leskinen said.

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In addition to raising fares, United has increased baggage fees in recent weeks. Since April 3, customers have been paying an additional US$10 on each of their first two checked bags, and an extra US$50 for a third checked bag.

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Delta Air Lines also increased baggage fees earlier this month. Passengers now must pay US$45 to check one bag, US$55 for a second, and US$200 for a third — an increase of US$10 on the first two bags and US$50 on the third.

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Like United, Delta CEO Ed Bastian indicated in an earnings call this month that the airline would “retain any of the pricing strength” gained, even if fuel prices decline.

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Elsewhere, American Airlines CEO Robert Isom also indicated that elevated price rises could be here to stay.

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When asked whether the airline will lower fares when fuel prices normalize, Isom pointed out that customers remain willing to pay more, with the company anticipating 15 per cent growth in the second quarter.

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“I’m bullish on what that means for our business,” he told analysts on a recent earnings call.

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Alaska Air Group CEO Ben Minicucci echoed that sentiment, saying “some of these fare increases are sticking,” when speaking to investors on April 21.

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Alaska’s chief commercial officer, Andrew Harrison, added that even with the increased cost of a ticket, “People want to fly. The airplanes are full.”

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Jet fuel prices have roughly doubled since the start of the war in Iran following the blockade of the Strait of Hormuz, a waterway through which a fifth of the world’s oil passes.

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Beyond raising fares, airlines have responded to cost pressures by cancelling flights.

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In Canada, Air Transat will suspend 6 per cent of flights between May and October, Air Canada plans to suspend six routes starting May 28, and WestJet is cutting capacity by about one per cent in April, three per cent in May and nearly six per cent in June.