Gas prices are falling, but why aren’t plane ticket prices? Jet fuel is one of the biggest costs associated with flying, but recent reductions in fuel prices haven’t generated much in the way of savings on airline tickets. Though it’s logical for consumers to expect falling gas costs to offer some benefit, unfortunately the airline industry hasn’t been quick to adjust airfares during the current drop in oil prices.
Lower Fuel Prices, Lower Fares?
Below is a chart that depicts crude oil barrel prices over the last 10 years (source: Climate Change Dispatch)
Many airlines have chosen to take advantage of lower fuel prices to increase their profit margins. Some, such as WestJet in Canada, announced that they have no plans to reduce ticket prices, opting instead to reinvest the extra money in the airline. Others such as Air Transat are currently offering cheap flights to London and other top destinations – fuel costs are notoriously volatile, dropping for a short time before climbing up again with no one able to predict when changes will happen or how long they’ll last. With this cycle in mind, airlines are breaking with the past tradition of making quick airfare adjustments, a decision which may provide better ROI for investors but has the potential to generate a negative response from regular customers.
Customers aren’t all on board with the idea of airlines pocketing extra profits instead of passing the savings on. From an individual perspective, savings on fuel should mean savings on airfare, but consumers who are upset with announcements from carriers such as WestJet aren’t likely to find anything different when seeking alternate options. Many airlines choosing to maintain current airfare prices won’t announce what they’re doing so, while prices remain competitive, there are few places for customers to catch a break.
It’s important for consumers to remember that fuel accounts for about one third of operational costs for most airlines, and the price of oil has fallen by half in the last six months (source: The Points Guy). If the price of airfare starts to fall along with it, then your miles may experience a corresponding decline in value. Aircraft maintenance, meals, beverage services and employee salaries all contribute to expenses in the airline industry. Fuel prices have little or no impact on the costs of these elements, and airlines need to be able to cover these expenses in order to operate in the black. According to The Boston Globe, a portion of the millions that airlines are saving in jet fuel are being reinvested in building fuel-efficient planes, airport terminals, and computers.
Short Term Benefits for Airlines
The airline industry doesn’t make as much in the way of profits as other types of businesses, and some carriers such as Air Canada see the extra money from fuel savings as a way to help pay down debts and continue operating smoothly. Just like any other industry or business, airlines have to consider the level of demand for their services and think of profitability when making decisions such as whether or not to adjust airfares.
Carriers in the US may see more benefit from keeping airfare prices steady than those in Canada due to the comparatively strong US dollar. Nevertheless, demand for sets remains high and airlines in both countries are likely to generate higher profits during the current stretch of low fuel prices.
How do you think the airlines are handling the situation? Leave us a comment below with your thoughts.