Americans Are Still Spending, and Rising Airfares Aren’t Scaring Them Off
Pricing power is shifting toward airlines and other companies that provide services consumers crave
Get ready to pay more for airline tickets.
U.S. airlines are charging higher fares and signaling that business and leisure travel demand should remain strong this year. It is the latest sign of how companies are expecting consumers to pay more for services and items deemed desirable.
“The U.S. consumer is financially healthy and continues to prioritize spending on experiences,” Delta Air Lines DAL -0.40%decrease; red down pointing triangle Chief Executive Ed Bastian said this month.
Prices for the cheapest U.S. flights are up 12% this month from a year earlier, according to Hopper, a flight comparison and booking app.
Other companies offering in-demand services are also betting that higher prices won’t turn off consumers.
Netflix said Tuesday it would raise prices for U.S. subscribers, expecting that households will be willing to absorb the higher fees despite several increases in recent years. The price of a premium subscription, which had already jumped more than 25% from $17.99 a month in 2021, increased another $2 a month.
Analysts expect steady demand also will allow hotels and cruise companies to drive prices higher.
At the same time, some makers of consumer goods and staples are finding a rockier reception to price increases.
“On the services side, you’ll have a little bit more pricing power than on the goods side,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “We’re still experiencing a little bit of a hangover from all the stuff that we bought here during the pandemic.”
Airfares plunged in the early months of the Covid-19 pandemic, only to soar in 2022, when airlines couldn’t add flights quickly enough to keep up with the frenzied urge to travel. Then prices tumbled when airlines expanded service and flooded into popular routes. Now airlines are constraining supply and lifting prices.
Airlines expect those higher prices to lift their financial results. Revenue at the largest U.S. airlines is forecast to hit new highs this year.
“We’re encouraged by the setup as we head into 2025,” Andrew Harrison, Alaska Airlines’s chief commercial officer, told investors Thursday. “Things are looking really good as we sit here today.”
Airlines are regaining pricing power after a glut of cheap seats weighed on domestic fares. Last summer, ticket prices slid at a time of year when they typically reach their apex. That trend made it harder for carriers to cover their own rising costs, including those associated with labor contracts they signed in recent years.
Instead of trying to fill seats at cut-rate prices, carriers slowed their growth, or in some cases shrank, to preserve profits.
Spirit Airlines, which filed in November for Chapter 11 bankruptcy, ended the year flying 20% less than it did in the final months of 2023. Southwest Airlines, facing pressure from an activist investor agitating for the airline to produce bigger profits, has pledged to moderate growth in the coming years.
Other factors including delayed plane deliveries are also keeping airlines from expanding more aggressively. In the first quarter, U.S. airlines are planning to increase domestic flying capacity by 1.6% from a year earlier, according to data from Cirium, a slowdown from the 3.5% growth rate in last year’s first quarter.
Andrew Nocella, chief commercial officer at United Airlines, said this month that domestic pricing is improving because of accelerating business travel and its competitors’ cutbacks on unprofitable flying. There are fewer fare sales, and discounts aren’t as steep, he said.
The airfare component of the consumer-price index rose 3.9% in December from the prior month on a seasonally adjusted basis—its fifth consecutive monthly gain.
Inflation-weary travelers are feeling the pinch, even as high-income households continue to shell out for flights and clamor for higher-end experiences.
In a survey of more than 5,000 travelers last year, Atmosphere Research Group found that a quarter of respondents reported annual income between $50,000 and $75,000, down from 28% a year prior.
“These are the people being hit the hardest by the higher cost of everyday living,” said Atmosphere President Henry Harteveldt. “People with the most limited incomes are not able to afford to travel like they once were.”
Discount airlines that have long catered to those customers are adjusting their business models to attract more consumers willing to pay up for extras. Most fliers are continuing to spend, airlines have said, and carriers including Frontier Airlines, Spirit, JetBlue and Southwest are hoping to appeal to them with roomier seats, or bundles that also include such amenities as better snacks and earlier boarding.
“We’re not worried about where fares are at—we think the consumers are willing to pay for a really good product,” said Devon May, chief financial officer at American Airlines. Fares “continue to be a bargain relative to a lot of other consumer goods or services,” he said.