Here’s why air fares aren’t going down, despite cheap fuel

Drivers are loving life whenever they fill up at the gas station. According to AAA’s Daily Fuel Gauge Report, the national average Thursday was $2.477 for regular 87-octane gas. That’s down 23 percent from the same time last year, when the average was $3.216.

So why haven’t air travelers seen similar savings on airline tickets? After all, fuel accounts for between one-third and one-half of the entire cost of running an airline, and the jet-fuel prices have fallen at the same pace as automotive gasoline, down 32 percent over the last year.

And yet not only are airlines not discounting fares, they’re counting their winnings after years of economic struggles: Slate’s Josh Vorhees reports that airlines in North America expect their profits to grow from $11.9 billion in 2014 to $13.2 billion in 2015. The trade group Airlines for America said in a statement that its members are re-investing in 317 new planes, better amenities for passengers, dividends for shareholders and employee benefits. The group added that:

Air travel remains one of the best consumer bargains, given its superior speed and price compared with other modes of transportation. From 2000-2013, U.S. Consumer Price Index rose 35 percent, whereas average domestic airfare rose 15 percent. Thus, adjusted for inflation, the average round-trip domestic fare fell 15 percent.

When the airline industry is financially healthy, everyone wins. Airlines should be treated like every other business. When the price of coffee beans falls, no one asks Starbucks why his or her latte does not cost less. …

Here are three big reasons why airline customers aren’t seeing cheaper fares:

  • Many airlines buy fuel ahead of time, locking in a fixed price for six months or longer. It’s called “hedging,” and although not every airline does it (American doesn’t, and it’s reaping a windfall), it explains why some travelers are still being hit with fuel surcharges. Sen. Chuck Schumer wants the federal government to investigate the industry: “Ticket prices should not shoot up like a rocket and come down like a feather,” he said.
  • Supply and demand. Where’s the incentive for airlines to reduce fares when their North American planes are filled to 85.1 percent capacity? As The New York Times notes in an editorial, “a series of megamergers has significantly reduced competition in the industry. The four biggest airlines in the United States — Delta, Southwest, United and American — control about 80 percent of airline capacity, down from 11 companies as recently as 2005. For most travelers, that has meant higher prices and jam-packed planes.”

It’s impossible to predict where fuel prices will be in the new year, and airline executives might be reluctant to reduce fares now, only to have to hike them again in a few months. Alexandre de Juniac, head of Air France-KLM, told The New York Times that oil might be between $70 and $80 a barrel next year (it’s below $60 now). But he added: “Obviously, no one really knows.”

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