Airlines Flex Pricing Power

Higher Airfare Expected in 2025 Due to Strong Demand and Limited Capacity Growth

Travelers walk through O’Hare International Airport in Chicago on Dec. 20, 2024.

Higher airfare is in store this year as strong demand, even during the dead of winter, and limited capacity growth prompt airlines to flex their pricing power. Fare-tracking platform Hopper this month said domestic "good deal" U.S. airfare in January is at $304, up 12% over last year, with more domestic flights going for more than they did last year through at least June.

Limited Capacity Growth

Late deliveries of new aircraft from Boeing and Airbus, air traffic constraints, and financial pressures have limited airlines’ ability to expand flights, which has pushed fares higher. Spirit Airlines, which filed for Chapter 11 bankruptcy protection in November, was the most dramatic case and has slashed its flights to cut costs.

Airlines’ Forecast

American Airlines on Thursday forecast a jump in revenue of as much as 5% in the first quarter over the same three months of 2024, while capacity will be flat or even down as much as 2%. "We do expect airfare to come up," American Airlines Chief Financial Officer Devon May said in an interview. The airline forecast a wider-than-expected-loss for the first quarter, however, disappointing investors as it expects an increase in costs, such as higher wages from new labor contracts signed last year.

Conservative Industry Growth

Startup carrier Breeze Airways on Thursday reported its first quarterly operating profit, for the fourth quarter, and founder David Neeleman, who is also the founder of JetBlue Airways, said conservative industry growth is boding well for future results. "The tide is lifting a lot of boats," he said in an interview. "We’re exceeding our targets in revenue. Momentum we saw in the fourth quarter is continuing into the first."

Revenue Growth

Alaska Airlines late Wednesday said it expects revenue growth for the first quarter to rise by "high single digit" percentage points with capacity up no more than 3.5%. United Airlines, which had a first-quarter earnings forecast that far surpassed analysts’ expectations, shared a similar sentiment, particularly for domestic trips. "The domestic pricing environment is improving as underperforming airlines remove unprofitable capacity at an increasing rate and business traffic growth accelerates," United’s Chief Commercial Officer Andrew Nocella said on the company’s earnings call on Wednesday. "Industry fare sales are less prevalent with lower discount rates as airlines are prioritizing profitability."

Conclusion

Higher airfare is expected in 2025 due to strong demand and limited capacity growth. Airlines are flexing their pricing power, and revenue growth is expected across the industry. With conservative industry growth and a focus on profitability, airlines are likely to continue to push fares higher.

Frequently Asked Questions

Q: Why are airfares increasing?
A: Airfares are increasing due to strong demand and limited capacity growth.

Q: What is driving the demand for air travel?
A: Strong demand for air travel is driven by business traffic growth and a focus on profitability.

Q: Will airfare continue to increase?
A: Yes, airfare is expected to continue to increase due to strong demand and limited capacity growth.

Q: What are airlines doing to increase revenue?
A: Airlines are focusing on profitability by prioritizing premium seating and introducing new amenities.