Plane tickets were cheaper again in July, but that won't last for long, economists say

By Nicole Greenberg

Airfares are likely to move 'substantially higher' as soon as next month

Plane tickets keep getting cheaper, even as price levels creep up again in the broader economy. But the cost of flying won't stay down for long, economists say.

Airfares dropped by 8.1% for the second month in a row in July, and tickets were 18.6% less expensive than they were at the same time last year. That helped dampen inflation levels, even as U.S. consumer prices rose slightly from 3% to 3.2% in July.

Several economists expect a jump in airfares soon, however, citing an increase in the price of oil at the end of July and in the first week of August.

"With rising fuel costs, domestic carriers will seek to improve margins with fare increases," Thomas Simons, senior economist at Jefferies, said in a note Thursday.

Read: Diesel prices may complicate Fed's inflation fight in months ahead

Michael Gapen and Stephen Juneau, economists at BofA, also "would be surprised to see [lower prices] continue for a third straight month," they said in a note.

Stephen Stanley, chief U.S. economist at Santander, echoed this conclusion, but for reasons beyond the cost of fuel. "Demand for travel services is unquestionably strong, airlines JETS are having trouble meeting that demand, and spot jet fuel prices have been rising since June. At some point, airfares are likely to move substantially higher," he said.

Omair Sharif, the founder of data-research company Inflation Insights, sees yet another factor behind an expected price increase -- a move toward seasonal normalization. Ticket prices have been volatile recently, he said, but historically, "airfares over the course of each year basically netted out to close to zero change."

The months in which more people travel are typically the same every year. As people return to prepandemic travel habits and airlines expand capacity to prepandemic levels, Sharif said, "I think we're going to get back to that more normal pricing pattern."

Another factor that could lead airlines to increase their prices in the long term is that several, including United Airlines(UAL), have recently negotiated contracts that give their pilots significant raises, Sharif added. "Some of those increased costs could eventually get passed on as higher fares."

He also noted that airlines added "more seats ... on more planes" in the last year, which eased previous supply pressures and led to lower prices. Capacity is now higher than it was before the pandemic, whereas last year, it was at about 90% of 2019 levels, he said.

The price of airline tickets skyrocketed in 2022 as people leapt at the opportunity to travel after the pandemic restrictions lifted, but at that time, airlines could not meet the demand.

"You had a ton more people wanting to fly and not enough seats for all those people. And so that helped to drive prices a lot higher," Sharif said.

Also read: The best and worst days to fly for Labor Day travel

Airlines are also facing changing consumer demands, according to a report by the Wall Street Journal, and some that could also be affecting ticket prices. Americans are jetting off to Europe this summer rather than booking shorter domestic flights that are integral to the business of airlines like Southwest and Frontier (ULCC).

Since the consumer-price index mostly captures prices of domestic trips, this shift to international travel could be a factor in an overall trend of lower prices.

"I think what happened in domestic travel last year is what's happening in international this year. And that's partly why you're seeing airfares and a CPI decline," Sharif said.

Consumers are also doing more leisure travel and less corporate travel as technologies like Zoom (ZM) reduce the need for business trips, the Journal reported.

But while the primary drivers behind the current lower prices are likely varied, Sharif noted in particular the size of the change when it comes to supply.

"If you look at domestic demand, you know it's down a little bit, but nothing crazy -- maybe 1% or 2%, whereas the capacity side is up like 7% or 8%," he said.

Southwest Airlines (LUV) shares are down 8.9% and American Airlines (AAL) shares are down 14.6% in the last month.

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08-11-23 0922ET

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