That wince you just made while researching travel options? Get used to it.
Why it matters: Soaring jet fuel prices are accelerating changes across the airline industry, seen in higher fares, premium-heavy cabins and fewer flight options for travelers.
- Airfares rose 22% year over year in September, marking a 10th straight monthly increase in the government's airfare price index, which hit an all-time high.
State of play: All the major airlines are feeling the pain:
- American Airlines reported today that its fuel bill jumped nearly 70% in the third quarter from a year ago, adding $1.9 billion in costs and undercutting its revenue growth.
- Southwest and United Airlines both slashed their profit forecasts this week on higher fuel costs.
- And Delta Air Lines expects its fuel bill this year to come in $6 billion above last year's.
The impact: To protect their bottom lines, airlines are raising fares and turning to more premium seats to squeeze more revenue out of their flights.
- At Southwest, the average passenger fare rose 26.9% to $231.69 in the third quarter, compared with a year earlier — and that doesn't include fees.
- Delta's premium seating revenue jumped 18% in the third quarter, even though the number of premium seats rose only 6%.
What they're saying: The airlines have few options to make up for extra fuel costs other than fare increases, said Scott Keyes, founder of flight-deal service Going.com.
- "None of them are hedging fuel the way they used to, in large part because they had a pretty terrible experience with it," Keyes said in an interview.
The big picture: Airline executives, however, see these changes — many of which were already underway — as a necessary new normal.
- This year's fuel spike has only "accelerated" change, Delta CEO Ed Bastian said on the company's earnings call on Oct. 9.
- "Regardless of the next move in fuel prices, the forces reshaping the U.S. airline industry will continue with many carriers struggling to earn their cost of capital well before the run-up in fuel," he said.
- United CEO Scott Kirby told investors Wednesday that the industry's underlying costs — including airport fees, maintenance and engines — have increased so much in recent years that airlines must fundamentally change their economics.
Zoom in: Executives echoed Bastian's comments on pricing from earlier in the month, suggesting this week that the higher fares and other changes to protect profitability are likely to remain in place even after jet fuel prices ease.
- "I'm pretty confident that we're not going to take steps backwards in pricing," Kirby said. "I think we're demonstrating this year that it's different this time."
- American CEO Robert Isom said the fuel price spike "has just been a catalyst to allow us to realize that there is value," referring to the strong demand from customers willing to pay higher fares.
And airlines are becoming increasingly reluctant to operate flights that don't make money — potentially leaving travelers with fewer options.
- United's Kirby predicted that trend will continue across the industry. "One golden rule — don't fly places that lose money," he said on the company's earnings call. "There's going to be less loss-making flying," he predicted.
Zoom out: The fallout from higher fuel prices — triggered largely by the war in Iran, which has throttled supplies — started with the shutdown of Spirit Airlines earlier this year.
- While Spirit's troubles were many, the fuel price spike was widely seen as the last straw for the budget carrier.
- And its exit means it's now easier for airlines to get away with charging more to cover their extra fuel costs, Keyes said.
- "Spirit's demise is another factor in why you're seeing airfare go up so precipitously because they and other budget airlines act as something of an anchor for airfare in general," Keyes said.
The bottom line: Fuel prices may eventually come back down. Don't count on airfares following.