Airlines May Actually Regain Some Pricing Power This Summer

Americans appear eager to break out after nearly a year in their coronavirus pandemic bubbles. Flight searches are up for trips later this year and multiple U.S. airlines predict an “inflection point” for travel at some point later this year that may provide carriers with flexibility to boost ticket prices.

“There’ll be a very steep increase in demand” during the months immediately following that inflection, United Airlines CEO Scott Kirby said earlier in January. Leisure travel demand could return to as much as 85 percent to 90 percent of pre-pandemic levels at that time, he added.

Travelers at Delta Air lines are beginning to show “behavior of pent-up demand,” the carrier’s CEO Ed Bastian told investors earlier this month. He added that, if the travel inflection occurs this spring, the carrier could eke out a small profit this summer. Delta lost $12.4 billion in 2020.

And while no one can agree when that inflection will occur — forecasts range from spring to summer to Labor Day — there’s consensus that it will happen once there is broad availability of Covid-19 vaccines. Only then will the influx of travelers come.

That’s music to the ears of beleaguered airlines. A quick rebound in travel means more butts in seats, and dollars in the bank after billions in losses. The industry is forecast to lose $118 billion in 2020 alone, according to the latest forecast from the trade group International Air Transport Association (IATA).

But that music may sound off-key to customers.

Airlines have shed hundreds of planes and pruned tens-of-thousands of staff from their workforces to weather the crisis. Most major airlines are expected to make it through but the cuts will limit their ability to quickly resume pre-Covid schedules. Numerous forecasts point to a multi-year recovery, until at least 2024, for global air travel. And when demand suddenly outpaces supply, prices — or airfares — go up.

“There’s a lot of pent up demand … and, yes, you will see pricing go up,” Cowen analyst Helane Becker told Skift. While she declined to estimate how much fares could rise in the short term, she added that average pricing is not expected to return to pre-pandemic levels for at least several years.

Travelers have gotten a deal during the pandemic. U.S. domestic airfares fell nearly 30 percent to an average of $245 during the third quarter of 2020, the latest available data from the Bureau of Transportation Statistics shows. The amount was also the “lowest inflation-adjusted average quarterly air fare” in 25 years.

What may occur when people feel safe traveling is something akin to the spike in fares during major events. For example, ticket prices often jump for flights to the Super Bowl host city when it’s known what teams will play. The cheapest fare for a one-way ticket on Southwest Airlines from Kansas City to Tampa is $719 in the days just before the Chiefs play the Buccaneers in the big game on February 7, but on other days flights can be had for as little as $245.

Travelers may expect something similar when Covid vaccines reach the broad tipping point where, as Kirby put it, “you feel like you can go everywhere in the country and go to a restaurant and be at 100 percent capacity.”

But, like for those expensive flights to the Super Bowl that still fill up, customers may buy tickets anyway.

“We anticipate a broad swath of leisure passengers will be price agnostic and may not even comparison shop,” said J.P. Morgan analyst Jamie Baker. “For families that have missed two consecutive Spring Breaks with their kids, July airfares are not expected to be a deterrent.”

Many potential flyers are already shopping for summer trips. Numbers from United show bookings down just 40 percent during the June-to-September period compared to 2019, whereas they are down roughly 70 percent this month. Customers face few penalties booking now with the hopes that it will be safe to travel in six months with change or cancellation fees a thing of the past.

All the airline talk of a travel inflection point may be something else entirely. The industry is desperate for travelers to return and, by warning of a steep return of flyers later in the year, could be purposely ginning up demand for investors.

“It is in their interest to talk about demand coming back,” said Wharton professor Z. John Zhang who studies pricing and competitive strategies. “It’s like a self-fulfilling prophecy — people who don’t want to fall behind [may go] and book tickets.”

Without a historic precedent for the a crisis like Covid-19, airlines lack few — if any — precedents to use as a model for the recovery, he said. “There is just so much uncertainty out there.”

One thing to watch is the roll out of Covid vaccines. The process in the U.S. is progressing slower than most hoped, with New York City even threatening to close vaccination centers due to a lack of supply. The new Biden administration aims to vaccinate 100 million Americans in its first 100 days but some have argued that the goal is not ambitious enough.

And for airlines, not only do they need a majority of Americans vaccinated for things to fully reopen, they need businesses to be comfortable returning lucrative road warriors to the skies. Becker does not expect business travel to recover to what she calls the “next normal” until around 2023.

In the meantime, there are deals aplenty for those willing to fly. Airlines continue to tempt would-be customers with sales and deals in an attempt to fill planes over the next few months. On Tuesday, JetBlue Airways tried to entice a sale by touting “Love a great travel deal?” in the subject of a promo email, while Southwest advertised “$50 fares to celebrate 50 years” in its own inbox foray. And that was just before lunch.

Analysts expect airlines to continue down this track — plying potential flyers with deals and promos — until travelers do return in masse. Then it will be back to their old playbook, or rather their next playbook.