Major U.S. airlines last week announced that they are reining in capacity due to high fuel prices.
The moves, coupled with what airlines say is surging demand, could send ticket prices soaring.
"If they are going to be pulling back capacity, prices are going to go up," said industry analyst Brett Snyder, who pens the Cranky Flier blog.
A February analysis by the Adobe Digital Economy Index showed domestic airfare prices exceeded 2019 levels for the first time since the pandemic began, with ticket prices averaging 5% more than in February 2019.
Now, with the notable exception of Southwest, the largest carriers have significantly trimmed capacity.
Though crude oil by the middle of last week had dropped to approximately $100 per barrel from a peak of about $120 the week prior, higher fuel expenses are still driving the capacity cutbacks.
Speaking at the J.P. Morgan Industrials Conference on March 15, Delta president Glen Hauenstein said the Atlanta-based airline would need its average one-way fares to increase by $15 to $20, or a bit less than 10%, to make up for higher fuel prices. United COO Andrew Nocella said his airline would need its total revenue per available seat mile to increase by a similar percentage.
Southwest, though, is facing less cost pressure. In her presentation at the J.P. Morgan conference, Southwest CFO Tammy Romo said that the Dallas-based carrier's fuel-hedging strategy gives it a significant advantage right now over other U.S. airlines. Based upon March 10 crude oil prices, Southwest estimates it holds fuel hedges worth $883 million for the remainder of this year.
The advantage Southwest is gaining from hedging is evident when comparing its estimated first-quarter fuel costs to that of competitors. Southwest expects fuel costs per gallon of $2.25 to $2.35. That compares to per-gallon estimates of $2.99 by United, $2.89 by JetBlue, $2.80 by Delta, between $2.73 and $2.78 by American and between $2.60 and $2.65 by Alaska.
Seattle-based Alaska is the second-largest user of hedges in the U.S. airline industry, with approximately 50% of its planned fuel needs this year hedged.
Airlines that don't hedge fuel say that hedging costs money over the long term, as they have to pay associated fees and they get locked into higher jet fuel prices when the value of crude falls.
"We have a natural hedge," said Mike Leskinen, United's vice president of investor relations, during the J.P. Morgan event. "Prices go up when fuel prices go up."
Demand is still strong
One area where U.S. airlines don't differ right now is in their robust assessments of the demand environment.
"We are seeing incredible revenue momentum," JetBlue CEO Robin Hayes said at the conference.
JetBlue now projects revenue for the first quarter will be down 6% to 9% from 2019, compared with its January projection of 11% to 16% down.
Outgoing American CEO Doug Parker said that domestic leisure demand is higher than it has ever been.
"Demand for travel is really strong. That I believe," said Parker, who advised investors at the conference to go big on the U.S. airline sector, especially the Big Three airlines of American, United and Delta.
American now forecasts that first-quarter revenue will be down 17% from three years ago, compared with a prior projection of a 20% to 22% decrease.
United, Delta and Southwest made similar forecast upgrades. Delta now expects to reach 78% of 2019 revenue during the first quarter, compared with its January projection of 72% to 76%.
United is expecting revenue to be near the top end of its January projection of being down 20% to 25% compared with 2019. And Southwest expects revenue to decrease by 8% to 10% from 2019, compared with its earlier projection to be down 10% to 15%.
While leisure demand is leading the air travel recovery, airlines are also reporting robust improvements in business demand.
"Business traffic is booming," noted United's Nocella. "We still have a long way to go. But we have made so much more improvement than we thought earlier in Q1."
The carrier reported that business revenue has reached approximately 75% of the pre-Covid level.