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Next Year is Shaping up to Be Another Good One for Airlines — and Travelers

The airline industry is enjoying a financial tailwind thanks to low oil prices and a bevy of add-on fees for everything from bags to boarding. This is good news for airline executives and stockholders, but it also benefits travelers, delivering cheaper ticket prices and more choice on competitive routes.

In a new report published this week, the International Air Transport Association said global airlines will be in the black again next year, although it predicts a collective profit of $29.8 billion, a fall from this year’s $35.6 billion.

Even though add-on fees and an increasing tendency for unbundled fares leave some passengers feeling nickel-and-dimed, researchers say airline customers today are more sanguine about the travel experience.

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Comfort Is Back

J.D. Power and Associates found in a survey earlier this year that traveler satisfaction with North American airlines hit a 10-year high, due to a combination of improved services and a growing tolerance for a fee-heavy pricing model.

“The experience actually is getting better,” said Rick Garlick, global travel and hospitality practice lead, although he added that airlines historically have lower satisfaction rates than other products or services.

Airlines have been investing in in-flight amenities like seatback entertainment consoles and Wi-Fi, and both United and American brought back free snacks within the past year. Delta plans to roll out an improved snack selection next week, and also is testing the reintroduction of a perk most travelers assumed was gone for good: free in-flight meals on some cross-country flights. The Department of Transportation even suggested earlier this week that cell phone calls could be allowed on some flights.

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“I don't think anger about fees is driving consumer sentiment,” Jay Sorensen, president of airline consulting firm IdeaWorksCompany, said via email. “Ancillary revenue, or a la carte pricing, allows airlines to offer the low fares desired by most consumers, and the option for these consumers to buy up to more comfort and convenience,” he said.

Fares Are Lower Than Ever

Low base fares make those tacked-on charges easier to swallow. Airline price-tracking app Hopper predicts that the average price of a domestic round-trip ticket will bottom out in January at $212. The November average domestic fare of $222 is 14 percent below where it was two years earlier. Fares are expected to rise through the first half of 2017, but even Hopper’s $253 average fare prediction for May is low by historical standards.

On a worldwide basis, IATA said the average round-trip airfare is expected to be $351 next year, 63 percent below 1995 levels.

Whether because of lower fares, more flight options, or better snacks, there are hints that the traveling public feels that they’re getting more for their money today.

According to YouGov BrandIndex, consumer perception of value over the past six months has crept up for JetBlue, Delta, and American. (Southwest tops the value-perception survey with a score of roughly double the second-place carrier.)

“It’s about what you pay in exchange for what you get,” said CEO Ted Marzilli.

“I think for the legacy carriers, it’s really a question of route maps and mileage programs… that can factor in to someone’s perception of value,” he said.

“It’s obviously been a great time in the last year or so for airlines because the oil prices have really plummeted,” said Patrick Surry, chief data scientist at Hopper. Although he said airlines can be slow to pass on those savings, increased competition — often from low-fare carriers — can prompt them to lower prices.

“There still is room to compete on price,” Surry said. “Those savings get passed on more rapidly in the more competitive routes.”

Legacy Airlines vs. Low-Fare Carriers

Lately, that competition has been coming from the low-fare carriers, said Jeremy Quek, air practice line lead in global business consulting for American Express Global Business Travel.

“The low-cost carriers like JetBlue, Southwest, Spirit and the rest… have grown capacity significantly in the past 18 months,” he said. Airlines generally try to avoid adding flights and routes because that spreads out the number of passengers. For travelers, the extra elbow room afforded by an empty middle seat is great, but for airlines, that empty space is lost money.

Fuller flights are more profitable, but when faced with more competition, airlines might elect to add flights in order to hang on to their market share on a particular route, even if that comes at the expense of profits, Quek said.

“From a consumer perspective, the greater the capacity, generally, in the short term, is good news from a pricing perspective,” he said.

Aside from oil prices, airline industry consultant Robert W. Mann said via email that the overall health of the economy will be another contributing factor.

“As ultra-low cost carriers continue to grow more rapidly than GDP, there will continued to be downward pressure on fares,” he said. “If GDP and demand improve, the equilibrium should cause fares and unit revenue to stabilize, perhaps increase slightly.”

“I don't think fares will go up significantly in the next year or so,” Surry said. “The airlines will continue to erode the profits they have as they battle each other… but that’s good news for consumers.”