CHICAGO, April 22 - United Airlines Chief Executive Scott Kirby said on Wednesday that ticket prices may have to increase by as much as 15% to 20% to compensate for a recent surge in jet fuel costs. Kirby told investors on the company earnings call that United is working to recover the full increase in fuel expense "as quickly as possible" and plans to move toward a 100% pass-through of those costs as it targets double-digit pre-tax margins next year.
"Yields need to increase by about 15% to 20%," Kirby said, adding that the company is operating under the assumption that fuel prices could stay higher for a longer period. The comments came after United issued profit forecasts for the second quarter and full year that fell short of Wall Street estimates, a shortfall the carrier attributed to elevated jet fuel expenses that are squeezing margins despite sustained demand for premium travel.
United shares fell roughly 6% in morning trading following the guidance and commentary. Executives said the company based its outlook on the Gulf Coast jet fuel forward curve as of April 17 and cautioned that actual results could fall at either extreme of its guidance depending on subsequent movement in fuel prices.
The airline expects to pay about $4.30 per gallon for fuel in the current quarter, a figure management highlighted to illustrate the pressure from rising energy costs. United said it has already taken steps to pass on some of the higher costs to customers, including implementing five fare increases late in the first quarter and raising baggage fees. Management said those measures have begun to partially offset fuel cost increases.
United provided a timeline for how much of the fuel cost increase it anticipates recovering through higher fares and other revenue measures. For the second quarter the company expects to recoup only 40% to 50% of the increase. That recovery ratio is projected to rise to 70% to 80% in the third quarter and to between 85% and 100% by the fourth quarter.
Company executives noted that ticket yields rose about 12% in early March and then climbed to roughly 18% in the second half of the month. Kirby said the airline has not yet observed a decline in demand as prices have risen, but he acknowledged that higher fares will eventually test consumers. "As yields increase, there will be an elasticity effect on demand," he said.
Overall, United is signaling an aggressive attempt to transfer fuel cost increases to customers while warning that elevated fuel prices and their trajectory are a key determinant of near-term financial results. The carrier is targeting recovery of fuel cost increases over the balance of the year, but noted that outcomes remain sensitive to movements in fuel markets and to consumer responses to higher fares.