Oil prices have continued to drop, falling to somewhere around the $55 per barrel range this week, and OPEC is saying that they may let it fall below 40 before taking any action. This has produced a number of complicated results around the globe, including a very real threat to Vladimir Putin’s power and the stability of Russia. On the home front, we’ve seen some of the lowest gas prices in years, with the promise of even bigger savings to come during the holiday travel period for drivers.
But you may be noticing something missing from the cost savings bonanza if you are planning to fly. Given that fuel costs account for 34% of the overhead spent by our major air carriers, by this point we should all be flying in cushy recliners at a cost of about a hundred bucks per round trip ticket. But for some reason, airline fares are not going down – and in some cases are still rising – despite all the other good travel expense news. What gives?
One persuasive argument holds that the airlines aren’t going to substantially cut their fares because they don’t want to and there’s really no compelling reason for them to not pocket the money.
Planes are full. Passengers clamor for amenities. Investors want a payout. New planes are on order.
Those are all reasons the airlines likely won’t be passing their recent savings on fuel along to fliers in the form of lower fares.
In fact, fares are going higher. And those bag fees that airlines instituted in 2008 when fuel prices spiked aren’t going away either.
In the 12 months ended in September, U.S. airlines saved $1.6 billion on jet fuel – their largest expense. In the first three quarters of this year, airlines posted a 5.7 percent profit margin, robust for the industry but lagging behind the 10 percent average for the Standard & Poor’s 500.
The main reason the airlines are not sharing the riches with passengers: There is no compelling reason to do so.
In the past six years, airlines have done a great job of adjusting the number of flights to fall just short of demand. As a result, those who want to fly will pay a premium to do so. Airlines are selling a record 85.1 percent of their domestic seats. Thanks to several mega-mergers, four big airlines control the vast majority of flights, leaving very little room for another airline to undercut fares.
Another key factor in costs, particularly for international flyers, is the “fuel surcharge” which airlines tack on to so many longer distance flights. They can run more than $500 for some flights to Europe and are, as the name implies, directly tied to the unreasonably high cost of fuel. But even as the cost of the fuel plunges toward one half of what it was a year ago, those fuel surcharges are not going away. In fact, in the case of some European flights, they are still being raised.
So what can you do about it? Aside from taking the train, basically nothing. The airline industry is one which is not immune to normal market forces and competition, but it’s quite resistant. There are now essentially just four main players and each is keenly aware of the prices the other three charge, as well as the fact that they don’t really need to compete at this point. Getting a new airline off the ground is such a massively expensive, risky and time consuming proposal that there is little danger to them of that happening. And who would want to take the risk based on nothing but oil prices which could shoot right back up to previous levels in a matter of months?
Fly the friendly skies. Just be prepared for the same cramped seats, offensive fees, lack of amenities, and high ticket prices as always.