A4A's John Heimlich discusses:
• How far airlines can push fares as fuel costs rise
• The particulars of business travel demand
• Why airlines are adding capacity despite pressure on profits
Airlines face limits on their ability to recover higher costs through fares, even as strong corporate revenue and demand for premium travel support parts of the industry. John Heimlich, vice president and chief economist for airline advocacy and lobbying group Airlines for America, this month spoke with BTN managing editor Chris Davis about airline profitability, corporate demand and the reasons carriers continue to add capacity despite expensive fuel prices. Edited excerpts follow.
BTN: How would you characterize the state of the airline industry right now?
Heimlich: It's a mixed bag, and it is really kind of bifurcated. We have eight publicly traded, independently branded US passenger airlines right now. ... The Wall Street consensus is that four of them will report profits this year and four of them will not.
I should emphasize that while fuel gets all the attention, it's by far not the only cost headwind and labor, airports, maintenance, insurance, all those things have been tough. All that's putting upward pressure on fares and resulting in additional losses for most, and even the carriers that are expected to turn profits this year will likely report lower profits than they did last year. ... Everyone's forecast at the beginning of the year for 2026 was rosier than what they're looking at now. ... So no matter where you are in the spectrum, it has been a challenging year.
The obvious bright side being that demand has held up in aggregate pretty darn well. You know the themes—premium, loyalty, international, that's strong. But I think for the most part, even main cabin is holding up pretty well. ... But look, from the airline standpoint, it's revenue that matters, and it's a strong revenue environment in general. Obviously, those who cater to premium and international are faring better than others.
BTN: Per Deutsche Bank, airlines are expected to recover only about 60 percent to 65 percent of their higher fuel costs. What's preventing airlines from recovering more through higher fares? Are we perhaps bumping up against the limit?
Heimlich: For the moment, I think we've hit a limit. It could be tested again. ... It's one thing to raise fares, it's another thing for people to agree to pay them. So to me, a successful increase isn't raising fares, it's raising fares and no change in demand or little change in demand. We'll see how that plays out, and I think they're testing the waters on that.
The context for that is that we had fuel [prices]subside in June and then around mid-July, they started to ramp up again and it just got crazy in August and September. The first half of October is running higher than September, and September had been the highest month ever for US jet fuel prices in nominal terms. And October is running higher.
When you have kind of a sudden and large run-up like that, it's hard to catch up on fares for that quarter because you've already sold probably 60 percent to 70 percent of your seats through the remainder of the year. So it's another round of playing catch-up.
Then the big wild card, of course, is the economy. So much of the economy right now is leveraged to wealth and stock portfolios and 401 (k) plans and all that. If we see that fall apart or sustained high energy prices put a dent in consumers' wallets, then we may see our pricing power cap down.
BTN: Are declining passenger counts a function of customers pulling back or airlines reducing capacity?
Heimlich: I think it's both. I don't think every seat that Spirit Airlines flew has been 100 percent backfilled. That's one factor. ... There's simply not as many seats to move every passenger. And then the rest: What you don't know is [whether would-be travelers are] pulling back because of air travel prices, or are they pulling back because their cost for everything else in their life is leaving less room to spend on air travel?
The most likely scenario is that we're losing the lower end of the "K" to some extent as people talk about the K-shaped economy. Those are generally people who might have been Spirit customers. But sure, there are a few folks where that's happening. It's really hard to tell, though, if it's specifically air travel or something else going on in their household budgets. It all adds up.
BTN: How much of the growth in corporate revenue reflects more business trips rather than higher fares?
Heimlich: I wish I knew. I wish I had access to that level of data granularity, but that tends to be internal at the carriers. ... The one thing I might suggest there, I haven't looked for a while at ARC's website, ... But at least as far as agency bookings go, they have pretty good figures on volume versus fares by month.
BTN: Are corporate profits still as useful an indicator of business travel demand as they were before Covid?
Heimlich: I do think it's still important. It's just not as high a share of the business as it used to be in total. So we know there's a lot more premium leisure than there used to be, and there's probably relative to where it would've been, there's less straight-up corporate, there's less same-day out-and-back.
But where it gets really hard to measure is that we think a lot of it's masked in hybrid travel or multipurpose travel of people. They might have a business meeting on Monday or Tuesday, but they'll go out the preceding weekend to make the most of it and get some leisure in there and then stay for the business meeting or vice versa. They'll tack something on, and that doesn't necessarily show up as corporate depending on how they booked it. We know there's a lot of that blended travel out there.
And of course, a big factor to all this is, well, I don't necessarily have to be there Monday morning at the office. So it's office policy combined with technological advancements where you can be very productive, very connected without physically being tethered. ... All that means it's harder to measure it in the way we used to. But I think there's no question from a revenue standpoint, corporate is strong. It's just harder to segregate who's traveling for what purpose now.
BTN: Is there a risk that airlines are adding more premium capacity than demand will support?
Heimlich: The answer is, there's no concern yet. That is clearly the $64 million question out there, but I tend to lean more optimistic about the whole thing. It's fairly easy to adjust capacity and cabin configurations. It's not totally simple, but what's difficult to adjust is labor costs. And often your labor costs are predicated on your future revenue streams and what you can sustain. And we have quite a high number of pilot and mechanic contracts that are either amendable now or will become amendable in 2027. So I think it'll be an interesting year given that backdrop of this. ... On one hand, you have the strong revenues, on the other hand, you have these high cost headwinds.
The other thing is, look, we'll always have a downturn. ... [But] this is not a brand-new phenomenon. I think the pandemic accelerated the phenomenon where people are increasingly valuing experiences relative to goods. So, sure, could we have a year or two where there's an oversupply of premium seats? Yes. ... But I'm not too worried. I think the airlines can adjust. And some of that will rise and fall with the vagaries of the stock market. I mean, the upside is if general inflation subsides [for] housing costs and food costs, then people will have more disposable income available for travel, not less.
BTN: Why are airlines accelerating domestic capacity growth while fuel costs remain so high?
Heimlich: Well, just about every carrier had planned to grow more than they are now, so they've definitely scaled back. I'll give you one specific data point. At the start of the year, Frontier was showing and was stating 20 percent year-over-year growth for 2026. They have scaled that back to 10 percent. I think American was closer to 10 percent and now it's 6 percent, 7 percent, somewhere in there. So with few exceptions, they've all scaled back their growth plans.
I think we have to peel the onion geographically a bit. Some of it is international opportunities. Some of it is a rare opportunity to backfill some of where Spirit was strong to get a foothold. And I think that's most true for Frontier and JetBlue. We've seen Frontier grow a lot in Orlando and to some extent in Tampa and Fort Lauderdale, and JetBlue big-time in Fort Lauderdale. I think some of that explains why they're doing that. We've had the battle for O'Hare between American and United. Austin, some gates have come online. A new terminal opened in San Diego, and Alaska and Southwest are duking it out there.
I look at the schedules every week, and for the most part, we started to see that those growth rates come down, ... It's more these rare opportunities that they don't want to give up. ... Right now, it's more of a revenue-oriented business ability to generate revenue than it is cost avoidance. So they're leaning in that direction.