In view of limited capacity and strong consumer demand easing the pressure on airlines to discount seats to fill them, airlines are flexing their pricing power.
Ticket price hikes are boosting the outlook for transatlantic airlines. Major U.S. airlines including Delta, Alaska Airlines, and United Airlines predict lucrative profits this year. Profit expectations for most European airlines are also set to improve.
Data from the U.S. Department of Labor shows that in December, airfare prices in the U.S. saw the fastest year-on-year growth in 21 months. Data from travel research firm ForwardKeys shows that in Europe, airfare prices rose by 6% year-on-year in 2024.
The International Air Transport Association (IATA) forecasts a 15% year-on-year increase in net profit per passenger for North American airlines in 2025. European airlines are expected to see a 12% annual increase in net profit per passenger.
Ryanair announced last month that due to improved pricing power, fourth-quarter profits exceeded expectations. CEO Michael O’Leary stated that limited capacity in Europe may drive up summer ticket prices.
Analysts from Bernstein estimate that the capacity growth of European airlines is far below the growth in travel demand. They refer to it as “the most encouraging industry situation in decades.”
European airlines are hoping for a better performance in 2025 after facing challenges in 2024 due to escalating costs and geopolitical instability.
Senior analyst John Grant from OAG stated that higher ticket prices will improve the performance of most European airlines in the March quarter, historically their weakest quarter. He said, “Most airlines have raised average ticket prices.”
Production slowdowns and engine delivery delays have led to aircraft shortages, delaying the growth plans of the aviation industry.
Due to challenges in the supply chain, Boeing and Airbus are experiencing slow aircraft deliveries. At the same time, inspections on Pratt & Whitney’s Geared Turbofan (GTF) engines manufactured by multinational aviation and defense conglomerate RTX are ongoing, leading several airlines to ground multiple jet aircraft.
According to data from travel data company OAG, 10% of aircraft fleets in Europe are grounded due to maintenance issues. Turkish Airlines has approximately 17% of its fleet grounded, with a 19% decrease in capacity compared to a year ago, causing average ticket prices to soar by 25%.
In the U.S., airlines are shifting their focus from market share to profitability, actively trimming their expansion plans. This is in contrast to the situation last summer when oversupply of seats made passengers highly price-sensitive, triggering an airfare war that ultimately hurt profits.
Therefore, it is estimated that domestic seat growth this year will be the slowest in at least a decade. United Airlines CEO Scott Kirby stated last month that the decline in flight volumes for U.S. airlines will continue.
Kirby told investors, “The industry is evolving toward a balanced state where airlines, driven by economic interest, will mainly focus on their competitive advantages.”
Higher ticket prices helped the six major U.S. airlines expand their fourth-quarter average profit margin by approximately 337 basis points.
Price increases and improved profit margins have driven a rebound in U.S. airline stocks. The NYSE Arca Airline Index has risen by 51% in the past six months, surpassing the S&P 500 Index’s 13% increase. United Airlines’ stock price has surged by about 155%.
There is hardly any evidence suggesting that rising travel costs are affecting consumer demand. Data from Airlines Reporting Corp shows that in December, U.S. travel agencies sold 17% more airline tickets than a year ago, with an average ticket price increase of 4%.
Senior executives from U.S. airlines state that households with incomes above $100,000 (constituting 75% of airline travel expenditures) are performing well and continue to spend significantly on travel.
Alaska Airlines’ CFO Shane Tackett stated in an interview, “People want to travel, and their budget still prioritizes experiences.”
(This article referenced reports by Reuters)