With airlines emerging from the shadows of the COVID-19 pandemic, they have increased capacity lately, anticipating huge passenger demand. And while travelers have come out in impressive numbers, carriers have also faced surplus capacity.
United Airlines, which posted a $1.3 billion net profit in the second quarter of 2024, will likely implement a capacity optimization in the coming months. The carrier’s CEO believes that a capacity reduction industry-wide will also raise airfares.
Hike in ticket prices possible
United Airlines’ CEO Scott Kirby believes that airfares could shoot up in the coming months as airlines are likely to reduce capacity to align with passenger demand.
Air travel has undoubtedly bounced back as millions of passengers take to the skies post-COVID. Airlines, too, have expanded services aggressively to cater to that demand, which has resulted in airfares dipping and even surplus capacity, with carriers unable to fill planes completely in some sectors.
Kirby believes that US airlines will likely embark on course correction in the coming months to prevent unprofitable flying on some domestic sectors by reducing capacity, which will ultimately raise ticket prices.
At a recent earnings call, Kirby, in response to a question, said that the airline revenue to GDP ratio will trend back. He looked back at history and said that this ratio declined every time capacity got ahead of demand. He expects airlines to trim their schedules to match the corresponding demand.
An inflection point in August
Kirby said that airlines in the US could tweak their capacity going ahead to keep operations profitable and that changes could be seen from the second half of August. He commented,
“It was always inevitable that carriers would begin to cancel this unprofitable flying and you see that happening in earnest in the second half of August in the schedules. As a result, it appears that the domestic industry capacity growth will moderate by roughly 5 points by the fourth quarter compared to where we were in the second quarter, which should provide a constructive setup as we close out the year and a particularly beneficial backdrop heading into 2025.”
Kirby acknowledged United’s recent good performance but said that absolute results are all that really matter. He added that the results are solid now, “but I can already see the impact that the schedule changes are having on our advanced bookings and yields as we hit the mid-August industry capacity inflection point.”
Quarterly results
United recently revealed its financial results for the second quarter of 2024. The airline carried 44.3 million passengers, earning a total operating revenue of $15 billion, pre-tax income of $1.74 billion, and net income of $1.32 billion.
Kirby said that the carrier has effectively managed costs, cash, and capacity against a challenging industry backdrop and that United is focused on meeting its financial goals.