The Economics of Airlines

A Lagging Industry

After two years of COVID and travel restrictions, travelers and airlines are still not out of the woods. United States airports have seen luggage mix ups, long lines, and flight cancellations; an American Airlines flight in Charlotte, North Carolina was forced to wait on the runway for six hours in sweltering heat. And the problems are certainly not limited to the United States. In fact, the worst effects are being felt in Europe, where lines at Ireland’s Dublin Airport reach the parking lots by 3 am, German carrier Lufthansa all but scrapped its domestic flight schedule, and Amsterdam’s Schiphol Airport even suspended the sale of tickets for a month. How did a comeback summer for the airline industry turn into such a logistical nightmare? The causes of today’s problems can be found in the early pandemic and the timeless principles of supply and demand.

Pandemic Damage

When COVID-19 shut down worldwide travel, it was unsurprising that airlines were among the hardest hit. The most immediate effect was that demand for flights–somewhat predictably–crashed in the face of travel restrictions and quarantine measures. This decline in demand meant that the price and quantity of airline tickets sold decreased, and airlines began to bleed money. In the United States, airlines received government aid from the 2020 CARES Act, including billions of dollars to maintain employee salaries in the hope that the pandemic air travel demand would soon recover. The pandemic, however, continued well into 2021, and as the government stimulus ran out, US airlines laid off employees in the tens of thousands. European carriers resorted to layoffs too. This abrupt downsizing laid the groundwork for the troubles of the summer of 2022.

Resurgent Demand

Even in 2021, as vaccines became available and the first wave of the pandemic receded, air travel demand remained low compared to 2019 levels. Many expected that an increase in demand for travel this year would be a boon to the struggling airlines. The staff shortages from the beginning of the pandemic, however, returned to haunt the industry. Faced with a rapid increase in demand for flights, airlines and airports found themselves lacking personnel to collect bags, fuel planes, or do anything else necessary for planes to fly. Travelers across the United States were thus faced with flight cancellations and redirections as airlines could not increase the quantity of flights supplied to meet demand. And US airlines had begun rehiring airline workers in the middle of 2021 due to a fairly early rebound in domestic air travel. European airlines, which had not experienced such an early resurgence, were hit even harder by the summer surge.

Exacerbation by Strikes

The air travel problem in Europe has been compounded by a round of strikes that have hit airports across the continent. Many of the airline workers who remain at these airports are refusing to work until they are granted higher pay. Some strike threats, such as at London’s Heathrow Airport, have been thwarted by compromises with management. Where strikes have not been prevented, air travel has been further paralyzed. There are other concerns beside labor issues; inflation throughout the economy has not spared plane tickets, with prices of domestic US flights increasing  25% from June 2021 to June 2022. The rise in fuel prices has also done no favors to airlines, and the Russia-Ukraine war has severely limited the available airspace in Europe. All of these factors have decreased supply, resulting in fewer flights and increased ticket prices.

Solutions

A variety of solutions to this problem have been floated. US Senator Elizabeth Warren is calling on the Department of Transportation to aggressively protect consumers by imposing fines for high ticket prices and flight cancellations and halting the combinations in the airline industry she blames for the current crisis. Meanwhile, fellow senator Lindsay Graham has proposed raising the retirement age of US pilots to ease labor shortages. The good news is that plane ticket prices, at least in the United States, have begun to fall; with the summer drawing to a close, demand for tickets has decreased again. As travel slows down, the pressure on airlines will surely decrease. The industry’s struggles, however, are emblematic of the larger forces of increased demand and decreased supply shaping the world economy in the wake of the 2020 lockdowns, which we will continue to reckon with for the foreseeable future.