Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Airline Industry
Transcript
- Lucas: So here we are, late July 2026, and if you've shopped for a flight recently, you've probably noticed something strange: ticket prices are up roughly 15 percent year-over-year, but planes aren't exactly full. Load factors — the percentage of filled seats — have dipped below 80 percent for the first time since 2023. Luna: Right. That's the textbook stagflation signal: costs going up, demand softening. And it's not just fuel — though oil's been creeping higher with that surprise Singapore tightening. Lucas: Exactly. Jet fuel is a huge chunk, but look at the latest import price data: costs from China hit their highest since 2008. Airlines buy a ton of parts, onboard supplies, even catering components from China. That adds up. Luna: And it's not just the big carriers. Regional airlines that operate shorter hauls with thinner margins feel it even faster. I read that some are already trimming frequencies on less profitable routes. Lucas: Before we go deeper, something to mention: if you find these conversations useful — if walking through the economy with us has made something click — the show stays ad-free because of listener support. Folks can help at buy me a coffee dot com slash fexingo. No pressure, just so you know. Luna: Yeah, it really does keep the lights on. And we don't interrupt with ads, so if it's your thing, great. Lucas: Anyway, back to airlines. So the big question is: can carriers keep raising fares without triggering a demand collapse? In the 1970s, after deregulation, airlines actually did okay for a while because business travel was less price-sensitive. But today, business travel still hasn't fully recovered from the pandemic shift to Zoom. Luna: And leisure travelers are more price elastic. If a family sees a $400 round trip becoming $500, they might just stay home or drive. That's exactly the kind of demand pullback we're seeing in the data: real GDP growth is running at 2.1 percent annualized — not terrible, but not enough to absorb higher prices across the board. Lucas: Meanwhile, the labor market is still tight. Unemployment at 4.2 percent, job openings at 7.6 million — wages are creeping up. Average hourly earnings hit 37.6 dollars. That's good for workers, but it's a cost pressure for airlines on the ground crew and pilot side. Luna: Pilot shortages have been a constraint since 2023, and now with inflationary pressure on salaries, that's another layer. Some airlines are offering signing bonuses again, which eats into margins. Lucas: Right. And then there's the tariff effect. The new global tariff announced last week on certain imports, plus the generic drug tariff plan — those send a signal that trade costs are going to stay elevated. For airlines that rely on global supply chains for spare parts, that's a multi-year headwind. Luna: Do we have any historical parallel? In the 1970s, airlines faced oil shocks and a weak economy, but the industry was heavily regulated. Today it's deregulated, which means they can adjust routes and pricing faster — but also that competition is brutal. Lucas: That's the key difference. In the 70s, the Civil Aeronautics Board set fares and route allocations. Now airlines have yield management algorithms that adjust in real time. So they're probably better equipped to match supply to demand. The danger is that they overshoot on price and throttle demand too much. Luna: We're already seeing capacity cuts on some transatlantic and domestic routes. Delta and United have both trimmed frequency on secondary cities. The data from the Bureau of Transportation shows available seat miles are down quarter-over-quarter for the first time in two years. Lucas: And that feeds into the macro picture: less air travel means less business travel, less tourism spending. In a stagflation scenario, that could compound the slowdown. But on the flip side, if airlines cut capacity successfully, they can maintain pricing power. Luna: So what's the bottom line? Is this a bumpy ride or a structural shift? Lucas: I think it's structural for at least the next couple of years. The cocktail of high input costs, tariff uncertainty, and a consumer that's still employed but feeling the pinch — that's not going away quickly. Airlines that have strong balance sheets and diversified revenue streams — like cargo — will weather it better. Luna: Cargo's been a bright spot. E-commerce demand keeps freight rates elevated. Some carriers are converting more passenger jets to freighters. That's a hedge. Lucas: Exactly. And that's the sort of adaptation we'll see more of. The question for listeners is: is the industry going to consolidate further? Maybe the smaller regional players get absorbed by the big three. That would reduce competition but also reduce capacity, which could keep fares high even as demand wobbles. Luna: Consolidation is likely. We've already seen some mergers in the regional space. And if margins stay squeezed, the weaker carriers will look for buyers. Lucas: So we're in a period where airlines have to be surgical about where they fly and how they price. It's not 2023 anymore, when revenge travel made everything easy. Now it's a grind. And that's the stagflation playbook. Luna: I wonder if we'll see a return to the 1970s service model — fewer amenities, more fees. People are already paying for bags and seat selection. Next step: charging for overhead bin space? Lucas: Don't give them ideas. But honestly, in a stagflation environment, unbundling actually makes sense consumers only pay for what they value. It's a rational response to high costs. Luna: True. And it helps airlines keep base fares lower to stimulate demand while extracting revenue from business travelers who need flexibility. Lucas: Looking ahead, watch the fall schedule announcements. If Thanksgiving and Christmas capacity are cut significantly, that tells you carriers are bracing for weaker demand. Also watch the Philadelphia Fed survey for airlines — if the outlook turns negative, it'll confirm the stagflation bite. Luna: Meanwhile, the breakeven inflation rate on 10-year Treasuries is at 2.26 percent, which is below where CPI is running. That suggests markets think inflation will moderate, but airlines might not see relief on fuel and labor costs for a while. Lucas: Right. So the disconnect between inflation expectations and actual cost pressures in labor-intensive, import-dependent industries like airlines is something we'll keep tracking. For now, buckle up — it's going to be a turbulent landing. Luna: Or a long taxi. Either way, not a smooth glide path. Lucas: That's it for this episode. We'll check in on the industry again in a few months to see if the strategies are working.