Since the beginning of the Iran war, United has successfully implemented five fare increases, in addition to raising baggage fees, airline executives said during the airline's Q1 earnings call.
As a result, yield, defined as the revenue the airline earns per mile that passengers fly, has been up 20% year over year in the past two weeks, chief commercial officer Andrew Nocella said. Before the war, yields were up 4% year over year.
Despite the increases, United said that demand has so far held steady, though the airline does expect it to tail off.
"While we haven't actually seen that decline yet, Econ 101 makes us believe it's coming," CEO Scott Kirby said.
Cuts to United's capacity, which the airline had previously announced, should act as a hedge against any dissipation of demand. The carrier has trimmed approximately five percentage points of planned growth from its schedule for the second half of the year and now expects to offer approximately the same capacity during that timeframe as it did last year.
The reductions will mostly impact Tuesday, Wednesday and Saturday schedules as well as red-eye flights. Kirby explained that the cuts will be to marginal flights that United believes would lose money with the current high fuel prices.
The price spike in jet fuel, which at times over the past month has been up nearly double compared to before the Iran war, led to a first-quarter fuel cost increase for United of $340 million year over year.
The airline nevertheless reported operating income of $997 million for the quarter, up from $607 million last year.
United's revenue was $14.6 billion, up 10.6% year over year as yields increased 4.2% and load factors went up 2.4 percentage points, to 81.6%.
Countering the revenue increase, operating expenses were up 8%.
Recouping the fuel costs
United forecasts that it will recover 40% to 50% of the second quarter fuel price increase through higher airfares and price hikes for ancillary products. The airline expects fuel cost recovery of 70% to 80% in the third quarter and 85% to 100% in the fourth quarter.
Kirby said that to reach 100% cost recovery, yields would need to go up an additional 15% to 20%.
Typically, when airfares surge due to macroeconomic events such as a jump in the cost of crude oil, they gradually return toward the baseline when the crisis is over. But Kirby said he believes up to 80% of these price increases could stay in place over the longer term, in part because airfares have not kept pace with inflation since the pandemic.
The longer jet fuel prices stay high, the more accustomed consumers will become to higher airfare, he explained.
"Certainly, the longer this lasts, the higher the probability goes that the prices hold," Kirby said.
United downgraded its full-year profit forecast due to fuel costs. The airline now expects earnings per share of $7-$11, compared to its earlier forecast of $12-$14.
United stock was down nearly 7% in mid-afternoon trading.