The days of the $14 plane ticket from Los Angeles to Los Cabos are over, according to United Airlines Holding Inc.’s top executives. Passengers ought to believe them.
After five decades of deregulation and a trail of setbacks including terrorist attacks, a global pandemic and a surprise war in Iran, the big U.S. carriers have finally learned that price discipline is their friend. The proof is in how quickly fares rose to absorb the blow from higher fuel costs this year, and in the carriers’ new willingness to cut back on seats in a tough market rather than battle to gain share.
Ed Bastian, chief executive officer of Delta Air Lines Inc., noted the industry recovered the fuel inflation caused by the U.S.-Iran conflict “at the fastest pace of any recent cycle.” Expenses for everything — labor, maintenance, aircraft, airport fees — have gone up for all airlines, forcing even the low-cost carriers to boost prices to cover the inflation, Bastien said during Delta’s earnings call earlier this month.
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Even with the recent price increases, average airfares are still 13% below pre-pandemic levels and have room to grow, said United CEO Scott Kirby, who also dismissed the aforementioned bargain fares to Cabo as “crazy stuff that just doesn’t exist anymore.”
Meanwhile, Frontier Group Holdings Inc. and JetBlue Airways Corp. are still losing money and will eventually have to jump on the price-discipline wagon, or risk following Spirit Airlines into bankruptcy. At any rate, they won’t be able to bully the big carriers into price wars.
“We've consistently demonstrated that we will adjust capacity when necessary rather than operate flying that does not make economic sense,” said Mike Leskinen, chief financial officer of United, during an earnings call this month. This seems like an obvious strategy, but it hasn’t been the reality since the federal government unleashed price competition among airlines in 1978. Instead, consumers benefitted from lower prices and more choice after the government stopped assigning routes and fixing airfares.
If Delta and United hold the line, as they seem prepared to do, the legacy airlines may have finally figured out how to create a more stable environment for prices, and for themselves. The secret sauce has been to offer premium products that affluent flyers are willing to pay for, which has given them flexibility to undercut low-cost carriers with more competitive pricing at the back of the plane.
There’s a lot of history to undo here. As deregulation paved the way for new entrants, the industry’s focus turned to airfare wars and the cost cuts needed to fund them. This led to packed planes with ever-shrinking seats and vanishing leg room. The rush toward the commoditization of flying weakened the industry and left airlines even more vulnerable to the external shocks that seem to hit every decade like clockwork, starting with the double-tap recession in the late 1970s and early 1980s that immediately followed deregulation.
Braniff, the first large carrier to succumb to heightened competition, failed in 1982. Eastern and Pan Am were killed by the oil shock and higher interest rates that followed the first Gulf War, which started in 1990. TWA would soon follow, filing its first bankruptcy in 1992. The terrorist attacks on Sept. 11, 2001, caused flight demand to plummet, pushing United and US Airways into bankruptcy. Delta and Northwest held on for longer, but both filed for Chapter 11 in 2005. American finally succumbed to bankruptcy in late 2011, weakened along with the rest of the industry by 2008’s Great Recession.
The pandemic in 2020, of course, halted most air travel overnight and saddled the industry with enormous debt from U.S. government support designed to keep airlines afloat. The pandemic was more consequential than the previous crises, though, in that it also shifted consumer attitudes toward flying. As the U.S. economy came back online, more passengers sought to be pampered during travel rather than automatically choosing the lowest fare.
Today, Delta and United are attracting flyers willing to pay up for larger seats, fancy lounges and fast internet, effectively subsidizing no-frills fares for more budget-conscious travelers. The basic economy fares don’t even have to beat the price of low-cost competitors because of the added perks of the big airlines, such as better on-time performance and free entertainment.
Low-cost competition remains vital to keep the full-service airlines from raising prices too much on their basic-economy seats. But the budget airlines have largely lost their cost advantage and rock-bottom fares will be harder to find. A structural change toward price discipline, though, could put all of the airlines on better financial footing.
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist writing about the industrial and transportation sectors. He was previously a Bloomberg News reporter covering logistics, manufacturing and private aviation.
