This rise in ticket prices is looking good for airlines on both sides of the Atlantic. Big U.S. players like Delta, Alaska, and United are predicting huge profits this year, and European airlines are also expected to see better earnings.
In December, airfares in the U.S. jumped at their fastest rate in 21 months compared to the previous year, according to the Department of Labor. Over in Europe, airline ticket prices increased by 6% year-on-year in 2024, as reported by travel research group ForwardKeys.
The global airline organization IATA is projecting a 15% year-on-year rise in net profit per passenger for North American airlines in 2025, while European carriers are expected to see a 12% annual increase in net profit per passenger.
These rising fares are a sign of strict capacity management, as a shortage of planes due to production and engine delays has limited the industry's growth potential. Deliveries from Boeing and Airbus have been sluggish due to supply chain issues, and ongoing inspections of RTX's Pratt & Whitney GTF engines have forced some airlines to ground several jets.
In Europe, about 10% of airline fleets are inactive due to maintenance and repair problems, according to travel data firm OAG.
For instance, Turkish Airlines has around 17% of its fleet out of service and has cut its capacity by 19% this quarter compared to last year, resulting in a 25% increase in average fares. Ryanair also reported better-than-expected profits for the December quarter, thanks to improved pricing power, with CEO Michael O'Leary suggesting that limited capacity in Europe could lead to higher fares this summer.
Analysts at Bernstein have noted that annual capacity growth for European airlines is falling short of travel demand growth by a significant margin, calling it "the most encouraging industry setup in decades."
European airlines are looking forward to a more promising 2025 after facing challenges in 2024 due to rising costs and geopolitical issues.
John Grant, a senior analyst at OAG, mentioned that the increase in ticket prices is likely to lead to better performance for most European airlines in the March quarter, which is typically their slowest.
"Most airlines have increased their average selling fares," Grant noted.
In the U.S., airlines are shifting their focus from gaining market share to boosting profitability, leading them to cut back on growth plans. This is a change from last summer when an oversupply of seats in the budget segment triggered a fare war that negatively impacted profits. Consequently, this year's domestic seat growth is projected to be the slowest in a decade. United's CEO, Scott Kirby, recently stated that the reduction in flights by U.S. carriers is likely to be a long-term trend.
"The industry is evolving into an equilibrium where each airline, driven by economic necessity, will be primarily focused on flying where they have a competitive advantage," Kirby explained to investors.
TARIFFS A 'MACRO WILDCARD'
There's not much indication that rising travel costs are affecting consumer demand. According to data from Airlines Reporting Corp, air tickets sold through U.S. travel agencies in December were up 17% compared to the previous year, with average ticket prices increasing by 4%.
U.S. airline leaders report that households earning $100,000, which make up 75% of air travel spending, are doing well and continue to spend on travel.
"People want to travel," said Shane Tackett, CFO of Alaska Air, in an interview. "They're still prioritizing experiences with their budgets."
The rise in ticket prices has allowed the six largest U.S. airlines to boost their profit margins by about 337 basis points in the December quarter.