Airfares Are Falling in the US and Could Go Lower

Plenty of people are trading Boston for Barcelona these days, with international travel staging the type of resurgence airlines saw last year in the U.S.

On the home front, however, U.S. airlines are confronting grumpy investors displeased with domestic demand that appears soft just as many carriers are boosting capacity to restore their networks to 2019-style sizes, which also helps to lower costs.

American, Alaska and Southwest all recently forecast unit revenue declines in the third quarter even as sales remain robust and the industry is poised for solid profitability this summer.

Executives at United and Delta Air Lines — the two most-exposed to international traffic — say they're not seeing signs of fare weakness thus far.

The airlines face a maxim familiar to anyone who’s ever read a financial prospectus: Past performance is no guarantee of future results. Their problem is that 2022 was singularly unique as cooped-up Covid survivors rushed to travel.

“People didn’t care where they were going or how much they spent,” Delta Air Lines CEO Ed Bastian said July 13 on the carrier’s quarterly call, explaining the post-pandemic phenomenon. “They just wanted to go someplace, and we were seeing fares of up 30%, 40%, 50%, particularly in a lot of the domestic markets where they could travel to. That’s obviously not sustainable.” 

As a result, the comparisons this year are far tougher and apt to become more so in the latter half of 2023.

“What happens in the fall?” has become a central question for airline investors worried that post-pandemic wanderlust might be largely sated by the time schools reopen. 

That would mean generally leaner demand and lower fares.

Even though business travelers aren’t resuming their pre-pandemic patterns, airlines are continuing to add capacity and labor expenses are cresting with new pilot deals completed or in the works at the four largest U.S. carriers.

Since April, airline fares have declined 11%.

That is among the steepest sequential consumer price declines, according to the most recent U.S. inflation data. (Egg prices dropped even more.)

The average U.S. fare for the rest of the year is $257 round-trip, down 11% from last year, and 9% from 2019, according to Hopper, a Montreal-based tech startup that tracks airfares. For September and October, two of the industry’s traditionally slowest months, U.S. fares average $218, 15% below 2022.

Internationally, fares for the balance of the year average $960, 8% above last year and 24% from 2019 prices, according to Hopper. For carriers with less international flying – such as Alaska and Southwest – a healthy U.S. consumer keen to travel at off-peak times is critical.

Another open question for the industry relates to how much seasonality has changed. For many carriers, June is now the best month financially, supplanting July, and October is no longer miserable.

Last year, the industry saw no major traffic or revenue declines after the summer: Is that the new norm or do pre-pandemic patterns re-emerge, with lower fares and less-packed planes before the Thanksgiving and Christmas holidays? 

“I think if you really look at it, international is going to be strong from maybe June through September, October,” Ben Minicucci, Alaska Airlines’ president and chief executive, told analysts. “But as kids get back to school and things start to normalize, like I do think this thing is going to find its equilibrium.”