Why airfares will likely keep getting more expensive

The surge in air travel demand is pushing up ticket prices from their pandemic lows.

Probably nothing speaks more to the post-pandemic economic recovery in the United States than the dramatic rise in demand for leisure air travel over the past several months. Since the number of passengers began steadily increasing in March, US airlines have found themselves besieged by Americans eager to escape Covid-19 confinement and travel to beaches, mountains and theme parks or visit family and friends.

Now, some flights to popular vacation spots are selling out, something airlines haven't experienced to this extent since the pandemic began, according to our own analysis. Travelers should expect airfares to continue to rise to pre-pandemic levels in the coming weeks, and likely move even higher in the months ahead.

Here's why:

Steadily increasing demand

Even in the absence of US business travelers, who normally account for a fifth of passenger trips and 30% of spending, according to US Travel Association data, some carriers find their passenger load factors — the percentage of capacity filled per flight — creeping toward or even surpassing 80%. That's not far from the US domestic load factor of 85% achieved in 2019, which was the busiest US air travel year in history, according to the US Bureau of Transportation Statistics.

That this is happening at a time when both business and international travel are still down around 70% from 2019 levels, according to our calculations, makes the rebound even more impressive.

With vaccination rates rising, Covid-19 restrictions lifting and entertainment venues like Broadway soon reopening, we expect to see domestic demand rise even further through the end of the year. There is particular concern about travel volumes at Thanksgiving and Christmas and the ability of airlines to keep up with demand.

International leisure travel is also likely to begin recovering this summer after the US Centers for Disease Control and Prevention recently expanded the list of countries to which Americans can make non-essential trips. And President Joe Biden and UK Prime Minister Boris Johnson recently committed to create a task force that would explore how to normalize UK-US travel. Based on these relaxations and the anticipation of more to come, airlines should expect increased international travel this summer and particularly around the December holidays.

Not surprisingly, the surge in air travel demand is pushing up ticket prices from their pandemic lows. In May, airfares were 24% higher than they were a year earlier. Fares have not, however, caught up with 2019 ticket prices. In May 2021, fares were still 11% lower than in May 2019.

Shortfalls in supply

The sudden rush of passengers has left many carriers a bit breathless. Given the spot outbreaks of Covid-19 around the US and relatively low vaccination rates in some regions, it was difficult for airlines to gauge the strength and duration of demand, and their attempts to expand the number of flights sometimes fell short, especially to vacation destinations.

Some carriers are also facing shortages of pilots, based on Oliver Wyman analysis. This is especially true for full-service airlines that operate several types of aircraft in their fleets and used early retirement programs to trim pilot ranks during the pandemic. With the quick domestic ramp-up in capacity, these carriers are finding themselves competing for resources and coping with limited flight simulator time to retrain their pilots on different aircraft.

While this training bubble may prove temporary, the shortage of pilots who are up to date in their training may continue to affect airline scheduling in the second half of the year, especially as international travel volumes increase and widebody jets begin to be flown again on international routes.

This year's crunch is a prelude to a more severe pilot shortage expected to materialize over the next two years. Skilled labor shortfalls for pilots, mechanics and other technicians are likely to put pressure on airline costs and ultimately ticket prices for several years.

Rising fuel costs

Adding to that cost pressure are rising fuel prices. The Energy Information Administration shows mid-June per-gallon prices for kerosene-type jet fuel more than four times higher than the low point during the pandemic in late April 2020. Fuel and labor are airlines' biggest expenses, and when they go up, higher fares often follow.

Like all crises, Covid-19 had compelled airlines to reduce capacity in 2020 by cutting the number of available seats as well as reducing their labor forces. Those decisions are likely to translate into higher ticket prices — at least until the industry catches up with demand.

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