One of the most dramatic economic developments of the past half-year has been the plummeting price of oil and gasoline. Crude oil has fallen from over $100 per barrel last summer to below $70 currently, driving gasoline prices down to well below $3 per gallon in most parts of the country.
But a funny thing is happening in the midst of this drop in crude oil prices: The prices of airline tickets are holding steady, if not slightly rising. For example, in October American/US Airways increased round-trip fares by $4 and United, Delta and Southwest quickly followed suit.
What’s Up With That?
This has many of the flying public scratching their heads. On the surface, it would seem that airfares, like gasoline, should fall along with oil prices, since about one-third of airline operating costs are consumed by jet fuel. However, this clearly is not happening — at least not yet. Airline analysts point to several possible reasons why:
- The economy is strengthening and demand for air travel remains strong. Usually, lower oil prices coincide with a faltering economy in which many people cannot afford to fly, forcing airlines to lower ticket prices. In this case, however, the drop in oil prices is due to an excess supply from Saudi Arabia. Meanwhile, the U.S. economy today is stronger than it has been at any time since the beginning of the Great Recession, with GDP growth clocking in at a healthy 4.6 percent and 3.9 percent during the second and third quarters respectively, according to the Bureau of Economic Analysis.
Therefore, airlines are not facing pressure from the flying public to lower ticket prices. For example, approximately 70 million people boarded commercial aircraft in August, which resulted in a domestic load factor of 86.8 percent, a new record.
- There is less competition among airlines today than there was a decade ago. The airline mega-mergers of the past decade have significantly reduced competition in the airline industry, reducing the number of major U.S. airlines from ten a decade ago to just four today. This makes it easier for airlines to hold the line on ticket pricing.
Thanks to such mergers as Continental-United, Northwest-Delta and the soon-to-be-finalized American-US Airways and AirTran-Southwest, there are fewer carriers battling each other for air travelers. In fact, the big four U.S. airlines — United, Delta, American and Southwest — now control about 75 percent of all domestic flights.
- Airlines are stronger financially than they have been in a long time. All of the legacy carriers except Southwest went through periods of bankruptcy at some point during the past decade. By merging and consolidating — not to mention adding fees for everything from meals to checked bags — they have been able to not only survive, but thrive.
Airline management and shareholders are enjoying this time of relative prosperity, and they are loath to do anything that might threaten it. The airline business is volatile enough as it is — history has shown that unforeseen factors can arise at any time and change the dynamics of the airlines’ financial equations. Instead of lowering ticket prices, some airlines are investing their increased profits in capital improvements — like renovating aging terminals and replacing older, less fuel-efficient planes — and increasing investor dividends.
What About the Future?
So what does the future hold for airfare pricing? As noted above, the airline business is extremely volatile, as are oil and fuel prices, so this is hard to predict with much certainty. Most analysts believe that oil prices will remain low for the foreseeable future. Does that mean we should expect airlines to lower ticket prices at some point if their fuel prices remain low?
One factor to watch is the overall economy. If growth starts to slow next year, and demand for air travel along with it, airlines may feel the need to start cutting airfare prices to lure passengers back on board. Nevertheless, as long as planes are flying at or near record capacity, there will not be much incentive for airlines to lower prices.
Another thing to keep an eye on is expansion in the airline industry. If oil prices remain low, this could prompt entrepreneurs to start up new, low-cost airlines. Remember that Southwest started as a low-cost, no-frills airline back in the 1970s before growing to become one of today’s big four.
Finally, remember that the airline industry tends to be a copycat industry — airlines often match their competitors’ price hikes or cuts within a matter of days, if not hours. So if one airline does decide to cut ticket prices and the others quickly follow, this could cause a domino effect that results in a sustained price decrease.
Hope for the Best
If you fly frequently for business or pleasure, you have probably already learned that trying to figure out or understand airfare prices is a fool’s errand. The airlines play by their own set of pricing rules, which don’t always seem to make sense.
Your best bet is probably to hope for the best when it comes to airfare prices — but don’t expect any relief anytime soon.