What’s News in Earnings: Inside Airlines’ Holiday Pricing Strategy

SPEAKER_1 (0:03)

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Jacob Passy (0:18)

Hey, listeners, it's October 28th. I'm Jacob Passy for The Wall Street Journal, and this is What's News in Earnings, our look at the big themes that are standing out this earning season. This year, the airline industry has been on less than solid ground. Many Americans were skipping vacations because of concerns about the state of the economy. This quarter, though, things are beginning to look up, and airlines are getting ready for the holiday travel season. Plus, they're implementing new pricing models, allowing them to charge more for airfare. So which carriers are poised for liftoff? We're joined by Wall Street Journal reporter Dean Seale, who's been tracking airlines for us. So Dean, how has travel demand been shaping up lately? Are people still postponing their travel plans like they were earlier in the year?

Dean Seal (1:11)

No, so demand has actually definitely been on an upswing right now. You're right that earlier this year, there was a few different things that impacted demand and that definitely weighed on airline revenues. We had the fatal crash in January, and that was cited by a lot of airlines as impacting their volumes. And then in April, we had President Trump's tariff campaign that also weighed on consumer confidence and in turn fell on travel demand. But most of the airlines are saying now that demand has picked up. It started to happen later in the summer. Some carriers are saying in July. Others saw it more in August, September. But it's definitely been on a resurgence right now, and we're seeing that carrying into the holiday season.

Jacob Passy (1:48)

And so what's the outlook for international travel these days?

Dean Seal (1:52)

So international travel is actually doing really well. And part of that is we're seeing more premium seats being sold, and premium seats tend to be correlated with an increase in international travel because people are taking longer trips they're going to want. So maybe extra leg room or they might be carrying extra baggage with them. So as we're seeing more of that premium revenue coming in, a lot of that is correlated to an increase in people leaving the US. And we've seen some of the carriers catch on to that too. Several have been announcing new routes. United just said that they are opening up some new transatlantic flights. They're going to be hitting destinations that are a little bit underserved right now. And a lot of those are in Europe in places where people want to find a holiday destination to go to.

Jacob Passy (2:30)

So, as you were just saying, it seems like people are paying more for flights these days. You spoke with the CEO of Delta, Ed Bastion, and here's what he said about the company's customer base, particularly households making six-figure income, and how they feel about paying up for this.

Ed Bastian (2:45)

Their number one objective is to travel, to go out and venture, to invest in themselves, invest in the experienced economy. And we are the premium provider of that. So, we sit at the sweet spot there for that cohort, and that's what's driving the great result that we're seeing.

Jacob Passy (3:01)

So digging into it further, what's driving airfares higher?

Dean Seal (3:05)

We're living right now in the age of the add-on. Flying has always been a very low-margin product, and so airlines are always trying to find ways to squeeze a little bit more profit out. And over the past few years, particularly since the pandemic, we're seeing more airlines finding new ways to charge for added things, like you said, extra legroom, extra baggage if you want to check in, or if you want to board earlier than anyone else. And so that's helping to boost up the top lines of these airlines while they're still dealing with higher operating costs.

Jacob Passy (3:33)

Were there any carriers that were having an especially rough go of it this quarter?

Dean Seal (3:39)

It's hard not to point out that Alaska Air had a pretty tough week last week. They did put out their report on Thursday night saying that while revenue was up, their profits were down about 69% because their operating costs are outgrowing the revenue. But that report actually came out a couple of hours after a pretty major outage that struck on the West Coast that was impacting tons of flights out in Seattle. It was an IT outage that ultimately caused the airline to cancel about 400 flights. This is particularly bad because there was another IT outage just about three months ago that canceled about 90 flights. So by all accounts, this one was much worse. So definitely a bad week and they are hoping for a better end of the year, but we'll have to wait and see.