Rising airfares, strong consumer demand boost profit outlook for airlines

Airlines are flexing their pricing power as limited capacity and strong consumer demand have eased pressure to discount fares to fill their planes. 

The rising fares have bolstered the outlook for carriers on both sides of the Atlantic. Major US airlines including Delta , Alaska and United have forecast bumper profits this year. Earnings at most European airlines are expected to improve as well. 

Airfares in the United States rose at their fastest pace in 21 months in December from a year ago, data from the Department of Labor shows. In Europe, airline ticket prices were up 6 per cent year-on-year in 2024, according to data from travel research group ForwardKeys. 

Global airlines body IATA has forecast about a 15 per cent year-on-year jump in net profit per passenger for North American airlines in 2025. European carriers are estimated to reap a 12 per cent annual increase in net profit per passenger. 

Rising fares are a reflection of enforced capacity discipline as a shortage of planes due to production and engine delays has put a cap on the industry's growth plans. 

Aircraft deliveries from Boeing and Airbus have been slow due to supply-chain challenges. And ongoing inspections of RTX's Pratt & Whitney GTF (geared turbofan) engines have forced airlines to ground a number of jets. 

In Europe, carriers have 10 per cent of their fleet inactive due to maintenance and repair issues, according to travel data firm OAG.  Turkish Airlines - which has about 17 per cent of its fleet out of service - has slashed its capacity by 19 per cent in the current quarter from a year ago, leading to a 25 per cent jump in its average fares. 

Ryanair last month reported better-than-expected profit in the December quarter on improved pricing power. CEO Michael O'Leary said constrained capacity in Europe could boost summer fares. 

Analysts at Bernstein estimate annual capacity growth at European carriers is undershooting travel demand growth by a wide margin. They called it "the most encouraging industry setup in decades." 

INCREASED FOCUS ON PROFITABILITY 

European airlines are hoping for a better 2025 after 2024 was marred by spiraling costs and geopolitical instability. 

John Grant, senior analyst at OAG, said higher ticket prices would translate into improved results for most European airlines in the March quarter, which historically has been their weakest quarter. 

"Most airlines have increased their average selling fares," Grant said. 

In the United States, a shift in focus away from market share to profitability has prompted carriers to aggressively reduce their growth plans. This marks a reversal from last summer when an excess supply of seats in the price-sensitive end of the market sparked an airfare war, hurting earnings. 

As a result, annual domestic seat growth this year is estimated to be the slowest in at least a decade. United's CEO, Scott Kirby, last month said the pullback in flying by US carriers was here to stay. 

"The industry is evolving into an equilibrium where each airline, driven by economic necessity, will be primarily focused on flying where they have a competitive advantage," Kirby told investors. 

TARIFFS A 'MACRO WILDCARD' 

There is little evidence that higher costs of travel are taking a toll on consumer demand. Air tickets sold through US

travel agencies in December were up 17 per cent from a year ago, data from Airlines Reporting Corp shows, with average ticket prices up 4 per cent from a year ago. 

US airline executives say households with earnings of $100,000, which account for 75 per cent of air-travel spending, are doing well and continue to splurge on travel. 

"People want to travel," Alaska Air's chief financial officer, Shane Tackett, said in an interview. "They're still prioritizing experiences with their budgets." Higher ticket prices helped the six largest US airlines expand their margins on average by about 337 basis points in the December quarter. 

The higher prices and increased profitability have fueled a rally in US airline stocks. The NYSE Arca Airline index has gained 51 per cent in the past six months, outpacing a 13 per cent jump in the S&P 500 index. United Airlines' stock has surged about 155 per cent during the same period. 

The situation could change if growing risks of a multi-front trade war make travelers tighten their purse strings. Economists have warned that President Donald Trump's tariffs could slow growth and fuel inflation. 

Daniel McKenzie, an analyst at Seaport Research Partners, said tariffs in the longer term are a "macro wildcard" for the industry. 

"Trade wars are bad for demand," he said.   

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