U.S. airfare spikes amid rising demand, oil costs

In their post-pandemic recovery, airlines are expanding their fleets, increasing their flights — and raising the cost of domestic tickets amid greater demand for air travel, higher fuel prices and an ongoing labor shortage.

Delta Air Lines President Glen Hauenstein said earlier this month that bookings are now outpacing those in 2019, pointedly noting that airfares will increase by “somewhere under 10%” as a result.

“We’re seeing an increase in demand that is really unparalleled,” Mr. Hauenstein told a JPMorgan investor conference.

What’s more, the travel booking app Hopper reports that the average price of a domestic round-trip ticket has risen 26% over the last year, to $290 this month. And according to the Airlines Reporting Corp., the average fares at U.S. travel agencies rose to $464 in February from $409 a month earlier.

Pandemic-related restrictions on travel and gatherings hamstrung the airlines, which sought to lessen financial losses by reducing operations and laying off staff. As those restrictions have lifted, Delta, American and Allegiant Air have announced plans to add planes to their fleets, even as shortages in flight crews and maintenance staff continue.

Delta, United and American have all reported higher-than-expected demand for tickets in the aftermath of the omicron variant of COVID-19.

American Airlines expects first-quarter capacity to be as much as 12% below the same period in 2019, which could mean higher fares for fewer open seats on flights.

And United Airlines expects first-quarter revenue to “be near the better end” of an expected 75% to 80% recovery of pre-pandemic levels, although it still predicts its schedule for the year will be lower by the “high single digits” than three years ago.

Economists attribute the airfare increase partly to the cost of crude oil, needed for jet fuel, which shot up to more than $130 a barrel earlier this month. But much of it predates the U.S. embargo on Russian oil to punish Moscow for invading Ukraine.

They cite a broad range of pandemic-related factors that include supply chain crunches and inflationary monetary policies.

“In my prudential judgment, this specific price hike has little or nothing to do with Russia [or] Ukraine,” said Walter E. Block, an economist who teaches at Loyola University, New Orleans. “Rather, the main culprit is the Federal Reserve System, with their excessive money creation. A minor factor is [President] Biden’s cancellation of pipelines from Canada.”

Dylan Pahman, executive editor of the Journal of Markets and Morality at the nonprofit Acton Institute, said the demand comes at a hard time for airports that reduced their workforces for the past two years.

“Also, the general rise in inflation certainly matters,” Mr. Pahman said. “While 7% is the oft-quoted number, that is likely based on the Consumer Price Index and only serves as a proxy for inflation throughout the economy as a whole, where the real rate may be higher or lower depending on the industry.”

While carriers normally purchase long-term fuel contracts that stabilize against short-term airfare swings, industry analysts say few carriers other than Southwest have hedged prices in recent years. That means some airlines could see more spikes in the coming months.

“Airfares are rising due to the rising price of oil and elevated refining costs,” said Daniel Lacalle, chief economist for Madrid-based Alpha Strategy. “While crude oil prices may correct as OPEC [Organization of Petroleum Exporting Countries] adds supply to the market and U.S. increases production, the challenge for airlines is that jet fuel may remain high due to the rising costs of producing it.”

Mr. Lacalle said the price of jet fuel “may fall a bit by mid-year, but not to the lows of 2019.”

The surge in demand for air travel comes as spring break and summer vacation bookings have rebounded from recent pandemic lows. Reuters reported Friday that the booking websites Vrbo, Hopper and KAYAK have seen spikes in spring and summer leisure travel bookings.

While the travel app Hopper has seen a 50% increase in bookings since the last quarter of 2021, KAYAK reports a 17% rise in flight prices two weeks ago over the same week in 2019.

At Vrbo, demand for summer vacation rental bookings is up 15% over last year.

AirDNA, which tracks more than 10 million properties on vacation rental firms Airbnb and Vrbo, said bookings for spring travel in the northern hemisphere are up 49% over this time last year and up 26% over 2019.

Economist Peter Earle, a senior fellow at the American Institute for Economic Research, said financial uncertainties make it hard to say where the airfare spike will end if demand keeps outpacing the industry’s expectations.

“First and foremost, there’s growing scarcity of oil and proximal products like jet fuel owing to the Ukraine-Russia war and Western embargoes. Countries like Saudi Arabia are, also, content to let the price float higher,” Mr. Earle said.

“Shipping problems in the Black Sea now include war surcharges which add to the final cost,” he added. “There’s also a seasonal factor at work: demand is higher for gasoline as the pandemic is winding down and the spring season arrives, bringing both work-related travel and vacation season.”

Analysts say it could all add up to ongoing sticker shock for American air travelers, who are already paying $300 to $400 for flights that cost $100 or $150 a few months ago — and that doesn’t include the prices of hotel rooms and rental cars.

Jeffrey A. Tucker, president of the free-market Brownstone Institute for Social and Economic Research, said the emerging crunch during “perilous economic times” suggests air transportation will be “a mess for travelers” this summer.

And he said the “dramatically rising costs of everything plus labor shortages” make it impossible to “parse out” what will happen next.

“It’s a man-made problem for which the airlines bear no direct responsibility,” Mr. Tucker said. “We are finally free to travel except that now it is more expensive than ever to do so.”