The President of United Airlines Thinks Airfares Should Double

United’s President spoke yesterday at the Morgan Stanley 6th Annual Laguna Conference. It’s always interesting to listen to him, he lays out his thinking more clearly and candidly than most airline executives.

One thing pointed out is that “in the last 30 years airline revenue as a percentage or GDP has gone to about .6 from about 1.2%.” The conclusion he draws is that airfares should double, “we are under pricing our product by 50%.”

  • Kirby sees airlines as naturally entitled to that level of revenue, that as the economy grows airlines ought to take their fair share.
  • That seems consistent with his thinking about ‘natural share’ that if the airline offers seats they’ll earn a percentage of business on a route
  • He rejects the notion that in a competitive industry price should fall towards marginal cost

Kirby says that cost is a better predictor of revenue in the airline industry than anything else because ‘everyone prices to costs.’ That’s because price is set by low cost carriers, and the majors follow. Kirby noted later that airfares track fuel prices very closely, it was in response to a separate question but follows from the same logic.

Kirby thinks airlines ought to charge more. And so his segmentation strategy – both in terms of products but also fare types for each product — is about charging different prices to different customers (“price to different demand curves”) based on each customer’s willingness to pay.

What’s missing in this analysis is differentiating United’s product. Low cost carriers set price because consumers see them as selling largely the same thing as major airlines. When airlines engage in product segmentation they’re trying to be all things to all customers, offering both a low cost carrier product and a premium product under the same brand, on the same plane, at the same time.

I’d expect airline revenue as a percentage of GDP to fall. I’d expect better service at a lower price over time, not the same or worse service at a higher price.

And other industries are simply more dynamic, the airline industry isn’t where you’d bet on GDP growth. In the same talk Kirby expressed his fondness for stock buy backs, which are an efficient way of redistributing capital away from low growth opportunity companies to bigger growth opportunities.

The US airline industry is mature, there’s little competition in business models amongst its largest players, and the domestic market is legally protected from foreign competition. New entrants can’t break in because government air traffic and government-managed airports lock them out of the best real estate.

Airline revenue as a percentage of GDP is falling because it’s a sclerotic industry, not because airlines fail to charge enough for the product they’re offering. The President of United Airlines, though, seems to disagree — and thinks you’re not paying enough to fly.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. What’s he waiting for? I think United should immediately double their fares.
    Go ahead and double the cost of a checked bag while he’s at it.
    I’ll continue to fly Southwest and be totally satisfied.

  2. No one is stopping this clown from raising prices for his product. Knock yourself out. If he wants to charge more for a more or less fungible good, feel free. I love his sense of entitlement using GDP as some sort of carte blanche to raise prices.

  3. That’s true if and only if we go back to 33-34″ pitch in coach, -1 seats wide in widebodies, and load factors of 70-80 percent (and thus planes not jam packed) instead of 90%+.

    I’m guessing that’s not what he is thinking.

  4. On my last budget domestic flight – AA 737 – I lthoight that I’d happily pay 30% more for the added comfort of a wider seat (eliminating the middle seat in the row) Since I personally don’t think paying extra for airline food is a good value or a necessity on a domestic flight eliminating snacks would reduce labor and costs. I also think that boarding first from rear of the plane to the front and requiring passengers with children under 12 to sit in the last row and create a sound partition. Leg room is not as important to me on a domestic flight as having my own arm rest and a less stressful exit from my seat

  5. Prescription for failure. United will be the first to fail as costs rise. They’ve done nothing to foster allegiance, If anything, they’ve done everything to alienate customers. United and American seem to be in a race to the bottom, to see who can be the worst of the legacy airlines.

    Animosity has a cost.

  6. This guy is a complete idiot. There may be a natural share within competing airlines at a particular airport or even within a geography, but to think there is a natural share of economic output that ought to go to airline revenue is preposterous.

  7. “He rejects the notion that in a competitive industry price should fall towards marginal cost”

    That’s all I needed to read to even further validate that this guy is a complete moron. Founders of economic theory > Kirby.

  8. Let’s not forget that they have already doubled the fare if not more
    By charging for everything that once came bundled
    The hard product is worse now and there is no true first class anymore
    Did I say saver award availability for redemption is the worst in decades ?
    That’s before I look at their lesser rewarding program in every regard
    Horrible consumer relations and passengers being abused if not dragged off their planes
    Good luck to them

  9. Dwondermeant makes some good points.

    Separately… I’ll stay away from the insults,. Kirby doesn’t seem to realize that he can only charge what the market is willing to pay for his product – that is, if he actually wants to sell it.

    I make my living as a number cruncher. While I do appreciate Kirby’s love of numbers (it sucks working for management who makes every decision based on gust instinct), there is a down side to being a slave to historical data. The statisticians call it “overfitting.” Yes, there are techniques to guard against it, but there’s no guarantee. If Kirby can’t or won’t recognize when market conditions and consumer sentiment are changing, he’ll be building a business based on bad data, which is no better than no data at all. Never mind that numbers are just numbers, and modeling well requires skill and human judgement.

  10. Please look at his remarks in context. He’s speaking at a conference of equity analysts. He’s saying what he wants them to hear. “Airlines have a tremendous upside so UAL stock in undervalued.” For all the reasons that your readers pointed out, its just a pipe dream. United cannot double fares because nobody would choose to fly on United. United (and others) will get crushed in the next economic slowdown because they keep increasing their fixed costs. Once revenue slows, it is very painful. See: Operating Leverage 101.

  11. That may be why some of my regular routes are 2x what they were last year.

    Oscar, it’s past time to fire Scott Kirby.

  12. If UA starts treating their customers 1) as people, rather than inconvenient necessities; and 2) 2x as nice, then….maybe.

  13. I’m not one for saying we should all be paying double – but it is true that airline fares have collapsed as measured in constant currency. Kirby’s high-level analysis is right – if you’re defining the product as “getting you from point A to point B by airfare,” he’s basically saying airlines are recovering 50% of what they used to as part of national income. given that so many more people are flying today v. 30 years ago (compared to rise in population) and that airlines are packing them in even more, that probably means the average cost of a ticket has fallen far more than 50% adjusted for inflation and economic growth. so compared to 1985 – while the product is a worse experience now, it’s undoubtedly a much, much better value per dollar than what we used to pay.

    doesn’t detract from any of the points above (the pricing to marginal cost in a competitive industry, increasing view of air travel as a commodity, etc.). so while Kirby is right, there’s no real way to actually get back to airlines being 1%+ of GDP. it’s why airlines have historically been such a terrible investment, unless you time it to buy at lows (see: buffett). it’s value that’s impossible to unlock for him – and why air travel is a steal today, even with all the fees and cattle-car like processes.

  14. What in the name of Hell was I thinking of?
    (Should’ve skip that “Johnny Walker” meeting the prior night with Dug).

  15. You wonder why UA sucks? What stupid reasoning. In that case, 200 years ago airline share of the GDP was 0%. Airfare should be FREE.

  16. I am not an economist or financial expert, all I can say is that I’ve hung onto loyalty for United by a thread through incredibly delayed product releases (lounge updates and revised business class) and then this guy thinks his sub-par product can garner a higher profit? I think maybe other airlines like Delta and some Asian/ME airlines can raise prices (and do frequently cost more) because their service and product is head and shoulders above United. I would also note that I am not sure you can compare historic price margins to the current situation since the proliferation of low-cost domestic and international carriers. United can go ahead and raise prices and watch me and other 1k folks go to Delta, to enjoy an already revamped business class product, when this is the straw that breaks the loyal camels back.

  17. I have an equally brilliant idea! Since GDP is essentially inflation-adjusted, let’s reset Scott’s salary to whatever Bob Crandall was making 30 years ago and adjust for inflation. I expect that figure will be well south of Scott’s $6M salary plus incentives. And while we’re at is, let’s reset the salary for all of the employees back to 30 years ago and adjust for inflation. I bet the pilots and other work groups would be thrilled.

  18. His thesis is even more ridiculous than you and others have suggested. Different sectors grow at different paces. For example, in 1990, health care was 12% of GDP and is now 28%. Technology obviously accounts for a much larger share of GDP than it did 30 years ago. As those industries shares went up others went down. BTW, why pick 1988 as the year for airline’s fare share? Why not 1930 when it would have been close to zero?

  19. Typical corporate jerk. Sure double the price. Double your salary and stock options. Make millions on the backs of the consumer and hide all the faults and bad management of a once powerful organization. Do your job and quit winning. Compete

  20. When you do not pay for your butt in the seat of course you can make some jackass statement like that. How about not having to use a can opener to get out of the seat after a 3 hour flight.

    how about having some extra legroom for cross ocean flights, I am surprised someone has not sue due to getting blot clots from sitting some long in a cramped position.

    this moron ought to have to fly coach once in awhile to hear from the peasants he so disdains.

  21. Let me correct my non auto corrected statement.

    When your not paying to put your butt in the seat of course you can make some jackass statement like that. How about not having to use a can opener to get out of the seat after a 3 hour flight.

    How about having some extra legroom for cross ocean flights, I am surprised someone has not sued due to getting blot clots from sitting in the same cramped position for such a long time

    This moron ought to have to fly coach once in awhile to hear from the peasants he so disdains.

    Gave up on United a long, long time ago.

  22. @Dug
    At the suggestion of previous commenters let’s just triple them. The gullibility of people is endless, but we already know that.

  23. Sure, double the prices. Then nobody will fly United. Or all airlines can double their prices, then people will fly a fraction as often as they do now and there will be a fleet of planes flying a third full and lots of airline bankruptcies. Dummies.

  24. I just booked a one-way United Flight from Newark to Fort Lauderdale for 51$, for October travel. (Going to Key West) Spirit at the time was 62$ before all their added fee’s. This is a ridiculously cheap fare, but it’s what you get when you race for the bottom. Had this fare been doubled to 102$, with United’s current product I may have opted for Spirit. Had it been doubled, but the flight had comfortable seats – I’d have gone with United. When you offer a comparable product, you go by price. When you offer a superior product, people like me will pay more. It’s simple.

    Side Note 1: My co-branded card giving me free carry-on and a free checked bag, makes me always choose the basic economy option.

    Side Note 2: I flew Ryan-Air in August for the first time ever, from Edinburgh to Krakow. It was shocking how much more comfortable the seats were over basic United and American economy. (Haven’t flown Delta in years, so can’t compare) The fact that arguably the worst airline in the world had better seats, was quite a bit of a surprise.

  25. Kirby is a complete psychopath and should be in a mental institution, not the head of an airline. He’s done more to ruin United than Smisek ever did and he’s not even the CEO. Oscar is just a puppet CEO since he can’t push back against Kirby.

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