Up, Up, and Away
Mirroring what’s happening across the consumer sector, several airline CEOs have made clear they likely won’t lower fares even if oil prices and inflation come down.
What goes up, must come down—except, apparently, prices.
Consumers hoping for some relief from elevated prices aren’t likely to get it anytime soon, at least if the leaders of the major airlines are to be believed. Though ticket prices have already risen by 23% this year, several airline CEOs emphasized during third-quarter earnings calls that fares won’t be getting any cheaper—even if oil prices decline. “We haven’t yet hit the ceiling where absorbing higher ticket prices has resulted in a dramatic falloff in traffic,” says Brian Rynott, a principal in the Civil Aviation practice at Korn Ferry. To be sure, during the third quarter, the major carriers flew roughly the same number of passengers year-over-year, but some of them posted record revenue results because of higher fares.
While airline-industry dynamics are unique, the practice of passing along costs to customers shows no signs of abating in other consumer-facing sectors, including those in which firms are trying to track buyer sentiment more closely. Leaders in retail, food, electronics, and elsewhere have all hinted on recent earnings calls that prices not only aren’t coming down, but also that they may rise further. Inflation and the war in Iran aren’t the only reasons, either: AI, supply-chain disruption, and structural market issues are causing firms to rethink their entire economic model, say experts.
But the biggest factor keeping costs elevated is the fact that consumers keep paying—whether on necessities, like groceries, or on splurges they can afford, such as travel. New-car sales grew 7.2% year-over-year in October, for instance, despite higher prices and financing costs. “If car companies can sell enough cars at higher prices, they will remain high,” says Brad Marion, global sector leader for the Automotive practice at Korn Ferry.
Elevated prices are also a function of widespread awareness of what everyone else in a given industry is getting charged and, in turn, what they’re charging customers. In areas like groceries, where the entire market has moved to a higher price point, “there’s little incentive to be the first firm to move prices back down,” says Chris Von Der Ahe, a senior client partner in the Consumer Markets practice at Korn Ferry.
Pricing power isn’t unlimited, of course, and there are a few things—outside of a decline in oil prices or inflation—that could bring costs down. Much as consumers started trading down to private-label brands in retail, they could start flying less or swapping premium seats for basic economy en masse. Doing so would exert pressure on airlines to change their pricing models. Similarly, a move to lower costs by a competitor could trigger a chain reaction among other players in the industry, says Von Der Ahe. “If a competitor gets aggressive on price and promotion and begins to take market share, others will follow suit to protect their position,” he says.
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