Why Are Airlines So Bad at Raising Fares?*
*In normal times, when fuel is reasonably priced.
Dear readers,
I love dumb questions because they often elicit the most revealing answers.
So I commend Scott Group of Wolfe Research for asking what he called a "naive" question earlier this month on United's first quarter earnings call.1 If airlines have shown they can raise fares 20 percent or more when fuel prices rise, Group wanted to know, why can’t they do the same without a crisis? After all, while consumers and politicians love to slap airlines anytime fares increase, the industry tends to produce smaller average margins compared to others. And they’d be even tinier without United and Delta.
Scott Kirby likes to remind us about his math acumen, so I figured he might share a sophisticated analysis of fare patterns. Or, perhaps he might he explain how raising fares in lockstep is illegal (remember the “capacity discipline” era?) and challenging to coordinate because some carriers grow for their own reasons.
But he did neither. Instead, he blamed other CEOs, saying some lack the knowledge and backbone to raise fares, except when faced with external stressors. Kirby said too many CEOs take advice from marketing and government relations executives and argued those people worry too much about whether the public will view their airlines as price gougers. In Kirby’s telling, that’s a big reason airfares have fallen in real terms since the pandemic.
”I’ve watched this for at least 25 years now and have come to the conclusion that ... every airline CEO should have to have spent two years at a reasonably senior position in revenue management [and] understand it,” Kirby said. “Most of them haven’t. That’s the reason it’s harder to get fares up.”2
I understand his argument. The math nerds who populate revenue management departments might be the smartest people at an airline, but many of them — how can I say this nicely? — struggle to communicate effectively. When they approach a CEO with ideas based on advanced math, Kirby said, they’re drowned out by louder voices who warn of public backlash. Some voices might remind CEOs that grandstanding lawmakers like to summon airline executives for questioning. Who wants that?