Friday, October 24, 2014

Why Low Oil Prices Don't Translate into Lower Air Fares

(CBS News)-  Southwest Airlines yesterday became the latest airline to report record profits, joining American Airlines and United Continental  thanks in part to record low oil prices.

Unfortunately, that's not going to translate into lower air fares anytime soon. In fact, the website FairCompare notes that carriers raised fares five times this year and attempted to do so 20 times. Experts are divided as to the reasons for this phenomenon.

According to aviation consultant Mike Boyd, the 25 percent drop in crude prices since June is no bargain for the airlines.

"The reality is that even at $85 a barrel, that is still high -- remember that no airplane flying today was designed with any thought of $50 oil, let alone $85," he wrote in an email to CBS MoneyWatch. "At current prices, there still isn't a lot of financial room for carriers."

Indeed, Airlines for America, a trade group, points out that when adjusted for inflation, the average domestic round-trip fare fell 15 percent between 2000 and 2013. The average price airlines paid for jet fuel during that same time period skyrocketed by 272 percent.

"While fuel prices have abated from their historic highs, airlines have high fixed costs including aircraft, rents, landing fees and labor," says Victoria Day, a spokeswoman for the association. "Like any industry comprising publicly traded companies, we must earn our cost of capital over the entire business cycle, so we can continue to invest in our products, serve new and existing markets, pay our employees and provide a reasonable return to investors."

But critics of the industry note there has also been a round of airline mergers that have lessened competition, such as the American Airlines/US Airways deal that closed last year. United and Continental joined forces in 2010, and Delta and Northwest Airlines started their merger process in 2008.

"Base airfares and ancillary fees will continue to rise as carriers are restraining capacity. Importantly, with far fewer competitors due to recent mergers it is much easier to tacitly coordinate on prices, policies and practices," said Kevin Mitchell of the Business Travel Coalition, in an email to CBS MoneyWatch. "After incessantly complaining about the demand-dampening effects of aviation taxes, when the excise tax lapsed in 2011, instead of reducing airfares and inducing demand -- presumably a teaching moment for Congress -- airlines kept prices firm and pocketed a $30 million dollar windfall per day. So, as sure as the sun rises in the East, airfares will not fall with oil prices."

Indeed, airline aren't adding any significant capacity. In fact, Boyd estimates that there will be a 1 percent drop in flights scheduled and a 1 percent increase in seats only because the average aircraft size has increased.

"Airlines can sell all their product -- so, like any business, the will charge what the market will pay," he said. "They are not charities that are required to produce more than they can sell at a profit."

Oh, and by the way -- there is no real "holiday jump" in air traffic. Actually the Monday-Monday period surrounding Thanksgiving will have about 12 percent fewer flights scheduled than during a "normal" Monday-Monday period. Wednesday and Sunday, load factors may go up from the normal 80 - 85 percent, but countering that is that there is much reduced business travel during the period.

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