United Airlines CEO predicts airfare hikes due to economic factors

Six years ago, Kirby shared his view that airfares should reflect a fixed rate of GDP over the long term, emphasizing that discounting fares harms airlines by reducing revenue per ticket without boosting sales volume. At the time, he argued:

“Airfares can rise because airline revenue as a share of GDP is lower than what it used to be.” He added that lowering fares is self-defeating as it does not increase sales but only reduces revenue from each ticket.

Later in 2018, he suggested that airfares should double since “in the last 30 years airline revenue as a percentage or GDP has gone to about .6 from about 1.2%... we are underpricing our product by 50%.”

In what Kirby refers to as ‘economics 202,’ he rejects the notion that prices in a competitive industry should fall towards marginal cost. Last year, he continued presenting data indicating fares should rise because airline revenue is below historical averages relative to GDP. Despite his consistent stance over the years, these changes have yet to materialize.

Kirby's analysis implies that airline products are not significantly differentiated and sales do not spur demand; people travel based on necessity rather than price fluctuations. This assumption overlooks potential technological replacements for air travel and other transportation modes which could affect overall demand.

Furthermore, growth in seat supply must match growth in demand for Kirby's theory to hold true. In congested areas of the country, limitations due to air traffic control technology implementation and hiring constraints at airports hinder expansion.

Even if airline revenues revert to historical averages relative to GDP, an economic downturn could reduce overall revenues due to decreased travel demand. Overcapacity during such periods would drive down fares as airlines compete within a constrained market.