Summary
- Airfares may rise as United’s CEO feels that airlines will reduce capacity to align with demand in the near future.
- Scott Kirby expects capacity optimization to start from August onwards.
- Airlines are likely to cut unprofitable flying and moderate capacity in the coming months.
With airlines emerging from the shadows of the COVID-19 pandemic, there has been an increase in capacity lately, anticipating huge demand from passengers. And while travelers have come out in huge numbers, carriers have also faced surplus capacity at times.
United Airlines, which posted a $1.3 billion net profit in the second quarter of 2024, will likely implement a capacity optimization in the coming months. The carrier’s CEO believes that a capacity reduction industry-wide will also raise airfares.
Hike in ticket prices possible
United Airlines’ CEO Scott Kirby believes that airfares could shoot up in the coming months as airlines are likely to reduce capacity to align with passenger demand.
There’s no doubt that air travel has bounced back significantly as millions of passengers take to the skies in a post-COVID world. Airlines, too, have expanded services aggressively to cater to that demand and this has resulted in airfares dipping and even surplus capacity, with carriers unable to fill the planes completely on some sectors.
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Kirby believes that US airlines will likely embark on course correction in the coming months to prevent unprofitable flying on some domestic sectors by reducing capacity, which will untimately shoot ticket prices up.
At a recent earnings call, Kirby, in response to a question, said that the airline revenue to GDP ratio is going to trend back. He looked back at history and said that every time capacity got ahead of demand, this ratio declined. He expects airlines to trim their schedules to match the corresponding demand.
Inflection point in August
Kirby said that airlines in the US could tweak their capacity going ahead to keep operations profitable and that changes could be seen from the second half of August. He commented,
“It was always inevitable that carriers would begin to cancel this unprofitable flying and you see that happening in earnest in the second half of August in the schedules. As a result, it appears that the domestic industry capacity growth will moderate by roughly 5 points by the fourth quarter compared to where we were in the second quarter, which should provide a constructive setup as we close out the year and a particularly beneficial backdrop heading into 2025.”
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Kirby acknowledged United’s recent good performance but said that absolute results are all that really matter. He added that while the results are solid right now, “but I can already see the impact that the schedule changes are having on our advanced bookings and yields as we hit the mid-August industry capacity inflection point.”
Related
United Airlines Says ‘No Excuses’ Approach Behind 2Q $1.7 Billion Earnings
United Airlines has posted strong second-quarter numbers, and its CEO believes that capacity is at an inflection point as airlines cut capacity.
Quarterly results
United recently revealed its financial results for the second quarter of 2024. The airline carried 44.3 million passengers, earning a total operating revenue of $15 billion, pre-tax income of $1.74 billion, and net income of $1.32 billion.
Photo: Angel DiBilio | Shutterstock
Kirby said that the carrier has been effectively managing costs, cash, and capacity against a challenging industry backdrop and that United is focused on meeting its financial goals.