United Airlines has spent years training passengers to pay more for better seats and amenities, and the strategy is paying off. As fuel costs climbed amid the U.S.-Iran conflict, the airline raised fares and leaned harder into “premiumization,” driving second-quarter operating revenue up 16% to $17.7 billion.
“Demand is strong,” United CEO Scott Kirby told Wall Street analysts on a conference call Thursday. “United has proven that our brand loyal strategy is working, and we’re using today’s environment to accelerate our investments in all aspects of the customer experience from nose to tail.”
United Airlines hasn’t quantified how much it’s increased fares, but flight search engine Skiplagged found that prices rose 35% for popular domestic routes and 15% for international destinations this summer, according to the New York Times.
Premium seats, premium strategy
Major carriers, most notably and successfully United and Delta Air Lines, have spent years persuading customers to pay more for tickets by investing in much improved services. The two airlines have built their businesses around higher-spending travelers, international networks, and lucrative loyalty programs.
The goal is to have passengers see air travel not as a commodity so much as a quasi-luxury experience. That has meant adding premium seats, offering access to snazzier loungers, free upgrades, and baggage fee waivers. (Major U.S. airlines have also reduced capacity and cut flights, helping their pricing power.) Revenue from United’s high-end seats was up 16% in the most recent quarter versus a year ago, compared to basic economy revenue growth of 11%. A similar narrative is playing out at Delta, where premium revenue grew 17%, outpacing overall growth.
And the two airlines are engaged in an arms war to convince travelers they offer the most deluxe flying experience. Delta, for instance, is testing planes in which the majority of seats are premium, while United touted plans to offer Wi-Fi supported by Elon Musk’s Starlink on 1,000 of its planes by year-end. (Delta has opted to go with Amazon’s satellite service, telling Fortune that its mix of entertainment and shopping options made it the more attractive partner.)
Teaching passengers to tolerate higher fares
These strategies have convinced passengers to go along with fare increases and be less sensitive to price. “There was another fare increase this week as fuel started to go back up. And there were no fare decreases when fuel went down,” Kirby said. (That is encouraging for United since it said its fuel costs could balloon by nearly $6 billion this year, higher than earlier projections. In the second quarter, United’s fuel expense was 84% higher than in the same period last year.)
And the tinkering with offerings continues. In March, United said it was swapping more economy seats for premium seats in some planes. This week, it announced it would roll out a new row in its “economy plus” area in which the middle seat is always empty, replaced by a shared table for the aisle- and window-seat travelers. It is reminiscent of British Airways’ short-haul business-class layout, which blocks out the middle seat, and is another example of airlines establishing more distinctions between cabins.
Kirby claimed that after stripping out inflation, plane ticket prices were about 13% below where they were pre-pandemic in 2019. And he noted that higher fares over the last few years were attributable to cost increases beyond fuel like airport fees, labor, and fleet maintenance.
That means passengers will likely have to live with higher fares, even if fuel costs drop, though so far, they’ve absorbed the hikes without much complaint. “Any industry has to pass along the price increases,” Kirby said.