Your next holiday flight will cost a fortune

Deutsche Lufthansa AG boss Carsten Spohr said the quiet part out loud last week, telling analysts the German flag carrier wouldn’t rush to add more aircraft capacity despite surging passenger demand, because high yields — industry jargon for average fares — “are just too much fun.”

Lufthansa isn’t the only airline executive sounding exuberant about soaring ticket prices helping repair their COVID-hit balance sheets. Leisure travel demand is off the charts, and US and European airlines are either unwilling, or unable, to increase capacity sufficiently due to staffing and equipment shortages. These highly advantageous conditions (for them) look set to continue for years.

In the past, airlines tended to quickly add more flights whenever demand increased, causing aircraft occupancy to deteriorate and ticket prices to sink, especially in the more competitive European market. As a result, many investors gave the capital-intensive sector a wide berth.

But for now, the balance of supply and demand has swung in favor of the airlines, who are able to pass on higher fuel costs and other expenses to passengers. Their pricing power has propelled the Bloomberg EMEA Airlines Index to a 78 percent gain since October.

Among European flag carriers, yields — a measure of average fares paid per passenger and kilometer flown— are around one-fifth higher than before the pandemic, and Lufthansa says they may increase further in the busy spring and summer months. (Industry body IATA is more cautious, predicting passenger yields will soften in 2023 compared to last year’s extreme levels when some short-hops sold for $1,000.)

Leisure travelers are increasingly paying up for a first or business class seat. Air France-KLM’s premium cabins are more full now than before the pandemic. That’s remarkable considering lucrative corporate travel has been slower to recover.  Advance bookings for Lufthansa’s first and business class options are also running well ahead of the pre-COVID trend.

But a shortage of capacity is also helping boost fares, particularly on long-haul journeys. Spohr reeled off a list of persistent hindrances he thinks will prevent the industry returning to its old capacity-splurging habits, including Airbus SE and Boeing Co’s production difficulties, engine and component availability and pilot and airport personnel shortages. He might have added airline bankruptcies and rising interest rates, which make it harder for new airlines to finance planes. Incumbents are therefore able to redeploy aircraft onto their most profitable routes and limit the availability of cheaper tickets.

“Capacities will remain limited for many years ahead while at the same time demand continues to increase,” Spohr said. “This is something we and the industry have been waiting for.”

His comments echoed those of United Airlines Holdings Inc. boss Scott Kirby, who said the industry is set for “structurally higher” profit margins. “The system simply can’t handle the volume today, much less the anticipated growth,” he told investors in January. Calling the supply-demand dynamics “different than they’ve ever been in my career,” he declared it a “once in a history of the industry opportunity.”

Capacity is creeping back near pre-pandemic levels but the recovery is uneven. Budget airline Ryanair Holdings Plc is aiming to offer 125 percent of its pre-COVID capacity this summer, while Air France-KLM targets more than 95 percent of 2019 levels. In contrast Lufthansa plans to offer just 85 percent to 90 percent of pre-pandemic capacity in 2023, up from 72 percent last year. By being disciplined, it expects to make more money.

Customers would be ill-served if airlines added too many flights too quickly and understaffed airlines or airports were unable to cope as we saw in the UK last summer and at Southwest Airlines Co in December. Indeed, some executives say that guaranteeing a reliable service may mean airlines need more pilots and aircraft than they had pre-pandemic — the economy is larger now and staff sickness rates are higher. These additional costs are likely to be passed on to customers.

Prior to the pandemic, ticket prices often failed to keep pace with inflation due to competition from low-cost airlines. Passengers often paid less for an airline ticket than they did for their Uber or rail ticket from the airport to their final destination, but this was financially and environmentally unsustainable. Budget carriers such as  Norwegian Air Shuttle ASA went bust.

Even Ryanair boss Michael O’Leary has declared the era of €10 ($10.6) plane tickets over, with its average fares some 14 percent higher in the latest quarter when compared to 2019 levels. He says Europe’s aviation market will end up looking more like the more consolidated North American market in the coming years, with stable capacity and upward pressure on pricing.

Even so, Spohr’s bluntness was inadvisable from a public relations perspective — Lufthansa required a multi-billion dollar state bailout in 2020, air travel remains a hellscape and customers are none too pleased about paying exorbitant prices. His comments also provide ammunition to budget rivals who accuse Lufthansa of abusing its dominant German market position.

Time and again since the pandemic, events that the general public might reasonably assume would be bad for companies — snarled transport, component shortages and staffing problems — have padded the profits of those businesses most directly affected. Supply chain bottlenecks are an elixir for corporate profits and a driver of consumer price inflation.

While a recession could yet puncture airlines’ rosy demand outlook and convince some leisure passengers an economy seat will suffice, capacity constraints look harder to resolve. Flying will certainly be no fun for passengers this summer.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg