Flight and hotel company Hopper has released its quarterly index revealing that airfare continues to be on the rise in the first quarter of 2022. Current prices are up 40% from the start of the year at $235/round-trip. With current domestic airfare at $330/round-trip, this is the highest it’s been since Hopper started tracking this data. By comparison, in 2019 and 2018 airfare increased 7% and 10% respectively over that same period. Airfare is currently trending closer to 2018 prices at this time.
Jet fuel prices have accounted for 30% of an airlines’ operating expenses, usually the second biggest cost aside from labor. This means back-of-the-envelope that if the full additional cost is passed on to the consumer, a 10% increase in jet fuel prices would (after some lag) result in a 3% increase in airfare. If only half the cost were passed through (and the airline took on the other half of the costs), we’d expect closer to a 1.5% increase in airfare. Since prices are up 40% since the beginning of the year, we’d expect an 8-12% increase in airfare attributable to jet fuel if prices remain at this level, some of which we’ve likely already seen.
According to the US’s Energy Information Administration, the price of jet fuel is currently $3.07/gallon, the highest prices since January 2014 –up 40% from $2.20/gallon at the start of 2022 and up 76% YoY from the same time in March 2021. Amidst speculation of potential crude oil shortages at the outbreak of the Russian/Ukraine conflict, jet fuel spiked as high as $4.10/gallon in early March. Usually price increases in jet fuel take a few months to show up in airfare, and the extent to which it appears can vary depending on airlines’ hedging programs and how much of the cost is passed through to the consumer.
In Hopper’s Q1 2022 Index the company forecasted domestic airfare to be around $290/round-trip in late March reaching 2019 prices by April, rising an average of 7% a month until May. 2019 prices were surpassed in the first week of March and are currently tracking at 2018 prices. Airfare rose 12% MoM in February and 19% MoM in March, significantly above what was considered an already relatively aggressive forecast for those months.
In the US, the the Transport Security Administration (TSA) is observing around 88% of 2019 traffic, comparable to heavy passenger traffic in late 2021 just prior to the impact of the Omicron variant. TSA throughput bottomed out in late January and has steadily increased since the long weekend of February 18th, which is when we forecasted seeing travel pick up in our Q1 2022 Index based on flight searches clustering for departure dates around that time. 2.36 million passengers on Sunday, March 20th, 2022 was the most seen on a single day since the start of the pandemic.
According to Hopper, this are some of the factors affecting the cost of flying in the US:
- Jet Fuel Prices: Significantly higher jet fuel price is one of the biggest factors impacting airfare in the current environment. Since prices are up 40% since the beginning of the year, we’d expect an 8-12% increase in airfare attributable to jet fuel if prices remain at this level, some of which we’ve likely already seen.
- Seasonal Effects: Higher seasonal demand will lead to higher airfare approaching the summer months. Lower seasonal demand post-July should help alleviate higher airfares heading into the fall. In 2019, we saw a 9% decrease in airfare between June and September.
- Seat Capacity: Carriers will gradually increase capacity for the upcoming summer months to capture higher seasonal travel demand, but these increases are likely to be more moderate as airlines contend with higher fuel costs. At 2.5m seats/day, currently US domestic seat capacity is down ~8% from 2.72m seats/day this time in 2019.
In terms of international airfare, Hopper believes that 2019 prices will be matched May, before further increasing in June. Hopper believes there is still significant pent-up international travel demand for the summer, given how significantly we are seeing searches increase for recently reopened countries. For example, Seoul, South Korea went from being the 26th most searched international destination to being just outside the Top 10 most searched international destinations just days following its reopening.
