Airlines test fliers' tolerance for high prices to bolster profits

LONDON/CHICAGO - US and European airlines will aim to boost profits again in 2024 with higher ticket prices as they try to squeeze what they can from the post-Covid-19 travel boom and mitigate higher costs amid persistent plane shortages, investors and executives say.

Major carriers are straining to lay on more flights to meet demand, but are struggling due to delays in new plane deliveries from Airbus and Boeing and the

grounding of jets using some RTX engines over potential defects.

Tight supplies, in turn, are keeping air fares high, allowing carriers to pass on higher jet fuel, labour and maintenance costs.

That has sent average revenues per passenger – known in the industry as yields and a proxy for airline pricing power – to 6.2 per cent in 2023, its fourth straight year of growth, according to data from global trade body International Air Transport Association (Iata).

Yields are set to rise further in 2024, albeit at a slower pace, by around 1.8 per cent, Iata has predicted.

According to Bernstein forecasts, European airlines’ yields this summer – the busiest time of year – will exceed 2023’s levels, hitting as high as 8.5 per cent, and increase even more in 2025 as travel demand continues and plane delivery delays persist.

Bernstein analyst Tobias Fromme estimates demand will have grown about 15 per cent to 20 per cent this summer since 2019, while capacity has barely budged.

Artemis Investment airline investor Jamie Lindsay said: “Higher fares this summer will keep driving profits. Airlines will make more money because customers are still willing to pay more.”

Interviews with half a dozen analysts, executives and investors and fare data show airlines’ resilience as they recover from the pandemic when planes were grounded, borders were shut and they took on billions in debt to stay afloat.

They also underscore consumers’ renewed focus on travel and experiences following the months of pandemic restrictions, known as “revenge travel”.

Wizz Air UK managing director Marion Geoffroy told Reuters that yields at the British low-cost airline will rise this summer by the same amount as 2023 even though capacity will remain flat.

“If there is constrained capacity, then the pricing environment goes up,” she said, without giving more details on the size of the increases.

Data from Airlines Reporting Corp shows that air tickets sold through United States travel agencies in January were the highest for the month, with average ticket prices up 3 per cent from a year ago.

According to travel data firm ForwardKeys, since 2019, fares to North America have gone up 30 per cent, while fares to Europe have risen 25 per cent.

Summer bookings will be a hot topic when British Airways-owner IAG and Air France-KLM release 2023 results on Feb 29.

They are expected to report higher operating profits, according to a London Stock Exchange Group (LSEG) analysis.

European budget airlines Ryanair and EasyJet have said summer bookings are very strong, although Ryanair was more subdued due to issues with sales via online travel agents.

US carrier Delta’s operating profits are projected to rise 3 per cent to US$6.5 billion (S$8.73 billion) in 2024, according to an LSEG consensus, while United Airlines’ profits are seen flat at US$5.1 billion.

So far, soaring fares have not dented demand. United has said bookings and yields on transatlantic routes are expected to stay strong in 2024.

Travel in China, one of the last markets to emerge from lockdowns, has also rebounded, with

tourism revenues soaring above pre-pandemic levels during the Chinese New Year

break in 2024.

“Talk to any airline at the moment, and they’ll tell you, their forward bookings are looking good for this summer,” said Mr Paul Charles, the founder of travel public relations specialist the PC Agency.

As long as the economic outlook remains stable, consumers may continue tolerating high prices, investors and analysts said.

But some worry that trend might wane, particularly with recent recessions in Japan, Britain and Germany.

Hotel operators Hilton Worldwide and Marriott International, and online travel agency Expedia, have already signalled an end to “revenge travel”.

“If you would see labour markets deteriorate further, that could start to impact demand,” said Ms Madeleine Ronner, a portfolio manager at DWS Smart Industrial Technologies, which invests in German flag carrier Lufthansa and travel agency TUI. REUTERS