Debt-fueled demand and oil price inflation drive airfares up

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By Ryan McMaken

If you’ve bought plane tickets recently, you’ve probably noticed the prices going up. It’s quite a reversal from the days of COVID lockdowns, when plane tickets could be bought for half the time 2019 tariff prices. Or even lower, in many cases.

But those days are apparently over, and as Yahoo Finance notes this week:

Airline fares soared 18.6% in April, according to the latest Consumer Price Index (CPI) report from the Bureau of Labor Statistics (BLS)…. The jump, which builds on the 10.7% monthly rise in air fares in March, marked the largest increase since the series was created as a component of the public transport index in December 1963.

On a yearly basis, airline fares saw a 33.3% increase over the same period last year, the biggest 12-month rise since the period ending December 1980.

Among the three major airlines – Delta, American Airlines and United Airlines – ticket prices jumped 49.4% on average year over year for the weekend [of] May 23.

The price increases come amid news that jet fuel prices have risen 116% year-on-year and staff shortages are becoming a growing problem for airlines. COVID lockdowns and other government-imposed restrictions on productivity have driven fuel prices up, while newly printed dollars for government stimulus mean more dollars seek out supply that can’t keep up.

Plus, consumers are spending dollars they don’t have. At least some of this expensive air travel is funded by debt and falling spending from COVID-era economies. After all, the New York Fed announced last month that credit card debt was heading for an all-time high and the personal savings rate had crashed to its lowest level in thirteen years. The savings rate has fallen for four months in a row, and is now at the lowest estimated level since August 2009. Nevertheless, air travel has become so entrenched in American travel plans that not even the highs of forty years in terms of inflation and falling GDP national product) are enough to dissuade Americans from buying tickets.

Airline deregulation and decades of lower prices

An important factor in Americans’ attachment to air travel is the fact that airfares have been falling overall for over forty years.

This is partly due to the federal deregulation of airlines in 1978. Previously, the Civil Aeronautics Board heavily regulated air travel and set airfares. Government bureaucrats had near total control over where airlines could fly and when.

Airline regulation was the product of a New Deal philosophy that the federal government had to limit competition and keep corporate profits high in order to avoid the “chaos” of corporate bankruptcies and bankruptcies. . Under these conditions, the competition that existed could not be played out in terms of air fares. Since the federal government controlled fares, this meant that airlines would compete by serving more lavish meals, employing more attractive flight attendants, or offering more attentive drink service. Indeed, it was government regulation that produced “the good old days” of elegant air travel that old-timers love to yearn for. If this era seemed more refined, it is because at the time, air transport was more of a luxury good. We didn’t have to worry about hoi polloi on flights because commoners had to travel by bus if they couldn’t afford to save up for weeks or months for a flight across the country. For example, “the average flight from LA to Boston in 1941 was worth $4,539.24 per person in [2017 dollars].”

However, after deregulation, prices began to fall rapidly and the total number of air travelers began to increase. Between 1978 and 2008, the total number of passengers on commercial flights doubled. In 2015, the $4,500 flight from Los Angeles to Boston would cost $480.89 and take just six hours.

From 1980 to 1990, the average round-trip domestic airfare fell by about 20% in inflation-adjusted dollars. The trend continued from 1990 to 2000. In 1990, the average domestic round-trip airfare was $600 in 2021 dollars, but for most of the 2000s average fares hovered around $400.

After that, however, the downward trend leveled off, although the total number of airline passengers increased by 28% from 2010 to 2019. Prices started to fall again after 2014. Unsurprisingly, average prices airlines fell 18% from 2019 to 2020 thanks to the COVID panic. . The total number of air passengers collapsed in 2020.

The fall in prices was not entirely due to deregulation, of course. Innovations in both technology and operations management (i.e. finding ways to travel more routes at lower cost) have all had a disinflationary effect. But it appears that economic progress in these areas is no longer outpacing price inflation as it did throughout the 1980s and 2000s.

After a decade of largely flat airfares, price increases are back in full force in 2022. The Bureau of Transportation Statistics has yet to release 2022 numbers, but estimates from travel data trackers like Hopper suggest that prices have increased by up to 40% since the start of the year. If so, then the average airfare in 2022 has reached a twenty-year high of around $460. A more moderate 33% increase, as recent year-over-year CPI data suggests, would take the average airfare to an eight-year high of around $430.

Average Domestic Round-Trip Airfare

Average Domestic Round-Trip Airfare (Airlines for America (airlines.org) and the Bureau of Labor Statistics.)

One thing is fairly certain, however: airline prices have not returned to “normal” in 2022. Since airline deregulation, “normal” has generally been falling or stable prices, even in the face of a growing demand. If current estimates materialize for 2022, we will see the largest year-over-year airfare increase in many decades.

American air transport, passengers carried

American air transport, passengers carried (World Bank database.)

This is just one more way to raise the cost of living for ordinary Americans. To what extent is this due to monetary inflation? It is impossible to know, since the demand for air transport has apparently often exceeded the increase in the money supply. But rising jet fuel prices, thanks to government-induced logistical shocks and currency depreciation, are certainly not helping. Nor are longstanding federal bans on foreign airline competition in domestic travel.

On the other hand, if the recession combined with a rise in interest rates is coming soon, consumers will indeed face a rising cost of consumer debt combined with unemployment. This would certainly dampen demand for air travel and lower prices.

Disclosure: No position.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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