United’s CEO Blames Fuel Prices For High Fares But That’s Not Really True

United Airlines CEO Scott Kirby blames high fuel prices for unprecedented increases in airfares. That’s a new tune for Kirby who argued for a doubling of airfares even in 2018.

Airfares increased 18% in April, the biggest increase for a month since the government began tracking this nearly 60 years ago. Fuel prices, though, aren’t the reason why.

"…in the short-term. So we are planning for this to be the new normal."

So fares are going to stay elevated?

"Certainly if that forecast of jet fuel prices is correct, I expect fares — this will be the new normal for fares."

Scott Kirby interview with @BloombergTV today.

— Ross Feinstein (@RossFeinstein) June 21, 2022

Today’s high airfares are not actually the result of high fuel prices. Airfares are the result of supply and demand.

Airlines don’t just decide to charge more because of high fuel prices. Instead, they pull back on capacity. Marginal routes and flights don’t run because they can’t make money at their higher cost to operate. So passengers don’t get those marginal seats that are sold less expensive, it’s only the higher cost seats purchased by passengers that are willing to pay more that fly.

So are airlines cutting back on flights because fuel prices are too high? No. They’ve been adding flights as fast as they can, but there are still fewer flights and seats scheduled this month than in June 2019. That’s not because of fuel prices.

  • Hotel prices are up too and while oil prices do matter to hotels (for their energy costs) no one would argue that’s why hotel prices are up.

  • Demand is up having mostly recovered (though not all types of demand, and not in all markets – more leisure, less business, and more spread out across days).

  • Supply hasn’t recovered in the same way (fuel contributes but isn’t the binding constraint on supply right now).

Several airlines are limiting their schedules because they aren’t able to reliably operate. Airlines want to fly more – even at current fuel prices – but don’t have the employees to execute those flights. They would increase the number of flights and seats, lowering airfares, if they could – even at today’s fuel prices. Take for instance JetBlue which Most recently JetBlue reduced its summer schedule 10% after operational meltdowns.

Airlines don’t have the planes or people they had before the pandemic. Taxpayers gave airlines over $50 billion in direct payments, and another half that in subsidized loans, plus airlines benefited from reduced taxes and payments to contractors and airports. And this was sold as being to keep everyone employed at airlines so that airlines would be ready to fly when passengers returned. That didn’t happen. Airlines shed employees wherever they could. For instance,

  • Delta reduced its workforce by more than 30% – nearly 29,000 employees.
  • American fired 30% of its management staff (and when they got the second round of payroll subsidies they actively worked to avoid bringing those people back).
  • Airlines offered early retirement incentives and buy out packages to reduce headcount.

American Airlines also retired its Airbus A330s, Boeing 757s, Boeing 767s, and Embraer E-190 fleets during the pandemic. That reduced the seats they can sell (though American squeezed more seats into 737s and Airbus A321s). Delta retired Boeing 777s and older portions of several fleets. Boeing has faced regulatory challenges that have delayed the delivery of new aircraft.

Fewer employees and fewer planes are constraining supply. Fuel is up but isn’t the reason there are fewer seats in the market. So we have an increase in passengers chasing not enough seats and tthatt yields higher prices.

As airlines grow and train their staff, and bring more aircraft on board, they may face a point of deciding to operating fewer flights than they could because of high fuel costs. But that’s not the world we live in today.

Related Posts

Leave a Reply

Your email address will not be published.