US airlines: higher fares and (hopefully) better service

Americans may enjoy complaining about their flying experiences but they cannot moan about shrinking airfares. Since 1995, the average US domestic airfare has fallen from nearly $600 to under $400, adjusted for inflation. United Airlines thinks that era may now be coming to an end.

On this week’s earnings call, United chief executive Scott Kirby opined that pandemic-era supply shortages would persist. Ultra-lean discount carriers would struggle to compete.

His message will exasperate his customers but please his shareholders. United hit its nine per cent operating margin target ahead of schedule. Even better, Kirby said the airline’s earnings could soon reach a permanent cruising level above 2019 levels.

The ratio of annual domestic airline revenue to US GDP dropped from 70 basis points in the 1990s to 40 basis points in 2019, highlighting the era of extreme competition. Pandemic-era pilot shortages and congested air traffic control systems mean rebounding passenger demand cannot be met easily with capacity increases.

Among the discount airlines, the challenge is clear. Consolidation may be needed. Southwest’s fleet suffered the most from the US winter storm disruptions. JetBlue and Frontier engaged in a bidding war for a third low-cost carrier, Spirit, in which the former ultimately prevailed.

United boasts that its investment in excess resources allowed it to avoid such a crunch and expects to grab market share from laggards. Its full-service rival, Delta, is even more confident. Its earnings per share in 2023 should almost double an already healthy 2022. With first-class service on all its flights, the bulk of Delta’s revenue comes from non-economy tickets and fees — a reversal from a decade ago.

Delta recently promised to introduce free WiFi on flights. If they can afford to pay the higher fares, more passengers can expect to receive better service on board US airlines.