The Cheap Airfare Party Is About to End
After years of bargain fares and low fuel prices, U.S. airlines are likely to follow the lead of the second-largest carrier and curb growth next year in a tried-and-true effort to boost ticket prices.
Delta Air Lines Inc. will extend its modest capacity growth of 1 percent in the fourth quarter to all of 2017, with Chief Executive Officer Ed Bastian citing “the weakest revenue environment in recent memory.” Given that the U.S. economy continues to expand, albeit sluggishly, the meager seat growth anticipated next year is reminiscent of the industry’s capacity slowdown after the 2008 financial crisis. For several years, U.S. carriers checked their growth as they maneuvered through the shoals of recession, high oil prices, and a wave of mergers.
Keeping a tight grip on seat capacity is an airline’s key to boosting airfares and overall financial returns. If the trend begun by Delta is writ large across the U.S. industry, 2017 capacity growth of about 3 percent will be the tightest in three years, JPMorgan Chase & Co. analyst Jamie Baker wrote on Thursday in a client note.
U.S. carriers are keen to reverse almost two years of declines in an industry metric known as passenger revenue per available seat mile (PRASM), a trend driven by capacity expansion and a profusion of low fares. (A seat mile is one seat flown one mile, the standard capacity gauge.) Delta’s choice of a slow-growth 2017 will “turn up the heat on American and United to demonstrate similar conviction” to reverse unit revenue declines, Baker wrote.
Delta shares have declined more than 21 percent this year, a steeper drop than those of its domestic rivals. The broader Bloomberg US Airlines Index has slipped nearly 10 percent this year. Hunter Keay of Wolfe Research said Delta’s quarterly report on Thursday was “the first of a few positive earnings season data points we expect where network airlines guide to capacity growth of less than 2% next year. That is the core of the entire bull case on the sector.”
Atlanta-based Delta closed up 74 cents, to $40.01, on Thursday in New York trading.
With sales adjustments over the summer, Delta said it has already begun seeing fares rise for so-called “close-in bookings” made 21 days or sooner before travel. The widespread collapse of fare rules for tickets sold shortly before a flight—which are predominantly the domain of business travelers—has been one of the chief culprits in the industry’s sliding unit revenues.
The airlines also need higher fares as they confront new pressures in 2017 on their two biggest costs: fuel and people.
Crude oil now trades around $50 per barrel, twice the price of just eight months ago. Delta and other carriers are expecting to pay even higher prices in the future. On top of that, several carriers will probably have higher wage costs if labor groups approve pending deals. Delta and its pilots recently concluded negotiations for a new four-year contract, with a 30 percent raise, Bloomberg News reported. Pilots at Southwest Airlines Co. are voting on a new agreement with a 29 percent pay hike, while pilots at United Continental Holdings Inc. have a contract provision that ties their income to whether their peers at Delta achieve more. Also this summer, Southwest and United reached tentative deals with flight attendants.
For passengers, more storm clouds may be gathering next week, when American and United report their quarterly results and are likely to preview capacity plans for 2017.