By Chris Bryant
Deutsche Lufthansa boss Carsten Spohr said the quiet part out loud last week, telling analysts the German flag carrier wouldn’t rush to add more aircraft capacity despite surging passenger demand, because high yields – industry jargon for average fares – “are just too much fun”.
Lufthansa isn’t the only airline executive sounding exuberant about soaring ticket prices helping repair its Covid-hit balance sheets.
Leisure travel demand is off the charts, and US and European airlines are either unwilling, or unable, to increase capacity sufficiently due to staffing and equipment shortages. The highly advantageous conditions (for them) look set to continue for years.
In the past, airlines tended to quickly add more flights whenever demand increased, causing aircraft occupancy to deteriorate and ticket prices to sink, especially in the more competitive European market.
As a result, many investors gave the capital-intensive sector a wide berth.
But for now, the balance of supply and demand has swung in favour of the airlines, who are able to pass on higher fuel costs and other expenses to passengers.
Their pricing power has propelled the Bloomberg EMEA Airlines Index to a 78% gain since October.
Among European flag carriers, yields – a measure of average fares paid per passenger and kilometre flown – are around one-fifth higher than before the pandemic, and Lufthansa says they may increase further in the busy spring and summer months. (Industry body IATA is more cautious, predicting passenger yields will soften in 2023 compared to last year’s extreme levels when some short-hops sold for $1 000/R18 000.)
Leisure travellers are increasingly paying up for a first- or business-class seat.
Air France-KLM’s premium cabins are more full now than before the pandemic. That’s remarkable considering lucrative corporate travel has been slower to recover.
Advance bookings for Lufthansa’s first- and business-class options are also running well ahead of the pre-Covid trend.
But a shortage of capacity is also helping boost fares, particularly on long-haul journeys.
Spohr reeled off a list of persistent hindrances he thinks will prevent the industry returning to its old capacity-splurging habits, including Airbus and Boeing’s production difficulties, engine and component availability and pilot and airport personnel shortages.
He might have added airline bankruptcies and rising interest rates, which make it harder for new airlines to finance planes.
Incumbents are therefore able to redeploy aircraft onto their most profitable routes and limit the availability of cheaper tickets.
“Capacities will remain limited for many years ahead while at the same time demand continues to increase,” Spohr said. “This is something we and the industry have been waiting for.”
His comments echoed those of United Airlines boss Scott Kirby, who said the industry was set for “structurally higher” profit margins.
“The system simply can’t handle the volume today, much less the anticipated growth,” he told investors in January.
Calling the supply-demand dynamics “different than they’ve ever been in my career”, he declared it a “once in a history of the industry opportunity”.
Capacity is creeping back near pre-pandemic levels but the recovery is uneven.
Budget airline Ryanair is aiming to offer 125% of its pre-Covid capacity this summer, while Air France-KLM targets more than 95% of 2019 levels.
In contrast, Lufthansa plans to offer just 85% to 90% of pre-pandemic capacity in 2023, up from 72% last year. By being disciplined, it expects to make more money.
Customers would be ill-served if airlines added too many flights too quickly and understaffed airlines or airports were unable to cope as we saw in the UK last summer and at Southwest Airlines in December.
Indeed, some executives say that guaranteeing a reliable service may mean airlines need more pilots and aircraft than they had pre-pandemic – the economy is larger and staff sickness rates are higher. The additional costs are likely to be passed on to customers.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.
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