U.S. airline executives say higher fares due to the Iran war have not dampened demand for tickets yet—but analysts say that could change with a protracted conflict in the Middle East.
Key Facts
- Looking at ticket sales for the six largest U.S. airlines, the average transaction grew by 2% (American Airlines) to 16% (Delta Air Lines) for the week ending March 8 compared to the previous week, according to new data from Consumer Edge, a provider of consumer spending data.
- Speaking Tuesday at a J.P. Morgan investor conference, executives of major U.S. airlines agreed travel demand remained robust enough to offset much of the huge spike in jet fuel prices caused by the war in Iran.
- Several executives suggested travelers are locking in summer airfares now before rates climb further.
- Jet fuel, which typically accounts for one fifth to one quarter of airlines’ operating expenses, was $3.93 a gallon Tuesday on the Argus U.S. Jet Fuel Index—up 57% since the U.S. and Israel began airstrikes on Iran 18 days ago.
How Robust Is Travel Demand?
The strong demand airlines are seeing now may be short-lived, as some of this strength “may reflect consumers booking trips ahead of potential fare increases tied to rising jet fuel costs,” Jeff Windau, senior analyst at Edward Jones, wrote in a note to investors, adding “tax refunds are likely to provide a short-term boost to discretionary travel spending.” A protracted war could make Americans less willing to spend on higher airfares. “If oil prices remain elevated for an extended period, travel demand could soften as inflation further constrains consumers’ disposable income,” Windau wrote. One big factor that could dampen travel demand would be a drop in the stock market. “As long as the stock market goes up, higher-income people will feel more confident in a way that lower income people won’t, and that impacts their discretionary spending,” Michael Gunther, senior vice president of research and market intelligence at Consumer Edge, told Forbes.
Could Premium Passengers See Bigger Fare Hikes?
Instead of raising airfare prices across the board, airlines may decide to hike some fare classes, such as premium and business class, before others. Generally speaking, the legacy airlines—American, Delta and United—attract higher-income customers who are less price sensitive than those who favor budget airlines. At the J.P. Morgan conference Tuesday, Delta Air Lines CEO Ed Bastian said the upper arm of the K-shaped economy, representing the most affluent Americans, was still strong “and we serve the top end of that K, and probably the highest end of that K,” noting the wealthiest demographic “is, candidly, a bit immune to what goes on with geopolitical events.” But while U.S. airlines “would like to charge more, they know they can’t just go out and start charging 20% more, 30% more,” Katy Nastro, spokesperson for the flight-deal company Going, told Forbes this month. “I don’t think we can assume premium travelers are just going to eat up this additional cost and lie down and take it.”
Will Airlines Cut Back Their Schedules?
For now, U.S. airlines are operating with their schedules mainly intact from before the war. But if the Middle East conflict continues, domestic carriers may begin to rein in capacity to offset their increased costs from jet fuel prices. Around the world, some carriers have already begun cutting flights. Scandinavia’s SAS said it plans to nix roughly 1,000 flights in March and April, Air New Zealand announced it would reduce capacity by 5% through early May and Vietnam Airlines warned it soon may have to scrub flights from its schedule.
What We Don’t Know
How long the war will continue. “The duration of the Iran conflict will be a key factor for the travel industry,” wrote Windau to investors. “Airport delays associated with the partial government shutdown, ongoing headlines about geopolitical tensions, and rising costs all have the potential to weigh on consumer sentiment and discretionary travel plans.”
This article was originally published on forbes.com and all figures are in USD.
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