America’s Big Three carriers alone implemented pay rises for their pilots worth almost $27 billion in 2023. Multi-year deals in each case, aimed at aligning salaries among the trio, mean Delta Air Lines, United Airlines, and American Airlines are still navigating incrementally increasing pilot wages as a result of the negotiations to this day. Needless to say, the three separate yet closely tied deals engineered by the likes of the Air Line Pilots Association have cost each airline billions of dollars.

Luckily for them, the costs can be offset through various means. As with any business facing rising expenses, the customer ultimately pays at least some of the price in one way or another. For airlines, it is not much different, with ticket prices no doubt used to claw back some of the cash spent on labor. But the full story is somewhat more complicated, and in the case of carriers, ticket prices are just part of the process of funding wage increases.

How Airlines Set Ticket Prices

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One issue airlines face is that ticket prices are the product of a massive, ongoing balancing act. Once upon a time, fares were fixed and determined by the so-called buckets they sat in. Today, however, dynamic pricing has become standard practice.

Using advanced revenue management systems, such as PROS, Sabre AirVision, Amadeus Altéa and Lufthansa Systems NetLine, carriers constantly adjust fares for flights based on a host of factors. These include the likes of competitors’ prices, demand forecasts, historical trends, and the rate at which seats are currently selling. This is why prices on websites might show as one figure one minute and then be completely different the next.

All of these are centered on one unifying goal: maximizing revenue from available capacity. If aircraft depart half empty because passengers were deterred by expensive fares, say, then the prices were too high and actually counterintuitive. Alternatively, bearing such factors in mind ensures revenue is not forgone if seats are flogged too cheaply. Either way, this effort to match prices to demand in real time means airlines have to be careful when passing on increased expenses to passengers directly.

Protecting Both Sales And Profitability At Airlines

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But carriers face another competing consideration when setting prices. The first is protecting sales, which can sometimes cap increases, as touched on above. The other is profitability, which effectively puts a floor on how much can be charged to customers. This is where careful planning comes in, be it in terms of routes served, aircraft deployment, crew requirements, and so on. All of this feeds into the practice of managing often razor-thin margins.

While fares are continuously adjusted and adapted to current market conditions, carriers also make longer-term decisions based on anticipated expenditure. These include wages, naturally, but also expenditures on fuel, aircraft ownership or leasing, airport charges, and maintenance. Plainly put, all of these have to be covered by someone.

Whether it is passengers that pick up the slack for any increases or not, well, therein lies the predicament for carriers. If the appetite for flights is not strong enough, simply piling more pressure on customers at checkout might not be a viable solution on its own. In such a case, something else has to give. At this point, airlines must make tough calls.

US Airlines Cutting Capacity As Fuel Costs Grow

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As it stands, profitability is taking precedence among airlines in the US. Each of the US Big Three has been carefully managing capacity in response to higher costs so far this year. This is not down to higher wages, like those resulting from 2023’s union negotiations, however. Neither is it due to lackluster demand, with fares also having been raised in tandem with constraints to capacity.

Rather, airlines across the globe are grappling with a surge in fuel prices amid the war in Iran. According to the International Air Transport Association, the shock was forecast to push fuel expenditure across the global industry up by 40% this year, from $252 billion in 2025 to $350 billion. Notably, this would be despite unchanged worldwide consumption of 104 billion gallons (393.7 billion liters) year-on-year.

Delta summed up the situation in its first quarter results. “Demand remains strong, and we are taking actions to protect our margins and cash flow,” it wrote. “This includes meaningfully reducing capacity growth, with a downward bias until the fuel environment improves, and moving quickly to recapture higher fuel costs.” In other words, Delta decided to limit supply because fuel was too expensive, but was also able to charge customers more since people still wanted to fly. The irony is, labor represents an even larger share of expenses for airlines in the US, yet appears to receive far less attention on the surface.

But Labor Overwhelmingly Costs US Airlines More

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In fact, there is a significant gap between labor and fuel expenditure across the US aviation industry. Based on data from trade body Airlines for America, labor accounted for 34.9%, or $21.8 billion, of US carriers’ spending during the first quarter of the year. Conversely, fuel sat at 17.1% and $10.7 billion in the meantime. Admittedly, the share of each narrowed slightly over the period due to the jump in oil, as shown in separate figures from the US Bureau of Transportation Statistics.

Regardless, US carriers still spent $11.1 billion more on wages than on fuel in the first three months of the year, per Airlines for America. That begs the question: Why do swings in fuel prices prompt more aggressive reactions from operators than changes in labor costs, when the latter is clearly the more costly expenditure?

US airlines’ first quarter fuel and labor costs and share of overall expenditure, from the Bureau of Transportation Statistics:

The answer is realistically simple. Changes in oil prices are rarely predictable. With fuel shocks, such as that caused by the ongoing situation in the Middle East, operators are forced to improvise at short notice. This can see passengers hit with an immediate, noticeable rise in the cost of their flights. Meanwhile, when staff pay conditions change, any movement tends to follow lengthy discussions and negotiations between employers and unions. As a result, even though carriers do pass on some of the higher resulting costs to their customers, this can be part of a longer-term and, importantly, more subtle strategy.

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Thanks to the predictable nature of labor, operators boast a range of tools to mitigate the impact of any rises, both on their own profit margins and on consumers’ pockets. At least, in terms of customers, any feed-through can be more easily controlled to appear less stark.

Indeed, passenger revenue comes from more than just the price of a ticket. Ancillary revenue, often covering baggage, seat selection, priority check-in or boarding, WiFi, as well as partner commissions, to name a few, offers another means of recouping costs. Combined, marginal increases in fares and ancillary charges across their passenger bases can generate huge sums for carriers without necessarily causing a stir over hikes.

Aside from hitting consumers with the bill, airlines can also look internally for ways to recoup costs. Be it investment in technology like dynamic pricing systems to maximize load factors, simplifying operations by flying the same type of aircraft, or even outsourcing some activities, there are plenty of ways to keep a cap on expenditure. The list could go on, but the fact is that all of this is constantly happening behind the scenes across the industry. When it comes to paying pilots more, companies have little room for maneuver, leaving other areas of businesses vulnerable to change.

Demand Cycle Key To Wage Increases And How They Are Funded

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Ultimately, demand plays a key role in determining how the industry responds to higher labor costs. Delta, United, and American Airlines signed off on their 2023 pilot wage deals at a time when the industry was bouncing back from several pandemic-disrupted years. Much like the backdrop to the ongoing oil shock, appetite was already strong enough for fare increases to be a viable option for funding higher salaries. In this case, however, demand also strengthened pilots’ negotiating position.

Even today, carriers are grappling to attract and retain talent. An amalgamation of expansion, an aging workforce, global competition between employers, and few signs that appetite for travel will slow anytime soon has created the perfect storm for pilots and their pay packets. So for airlines, the question is not simply whether they can afford to pay their pilots more, but where that additional cost lands: directly with passengers through fares and ancillary charges; at the hands of shareholders via lower profits; or indirectly on passengers through reduced services.