Airlines Keep Fuel Savings For Themselves

By Andy Tully, Oilprice.com:

On Dec. 14, Oilprice.com looked at how the drop in the price of crude was affecting air fares. While motorists were enjoying low pump prices, we found, air travelers were paying the same for a ticket as they were before the oil slump.

That was attributed to airlines’ practice of buying backlogs of jet fuel at older, higher prices long before the price of oil started falling, as well as their efforts to reinvest in themselves to improve operations.
The conclusion was that for 2015, the price of a barrel of oil would rebound to around $80 per barrel, and that fares would drop once the airlines used up all they oil they bought back when crude cost more than $110 per barrel.

That report also mentioned consolidation – mergers – which have a tendency to reduce competition and so allow airlines to set prices with a reduced fear of being undersold. And that turns out to be where air fares stand nearly three months into 2015. In the United States, for example, there remain only four major airlines: American-US Airways, Delta, Southwest and United.

This is not a recipe for fierce competition. In fact, Vinay Bhaskara, an industry analyst, writes in Airways News, “We are unquestionably living with an air travel oligopoly.”

As before, the fuel savings are going into reinvestment in the airlines and, understandably, rewarding investors who have spent years earning little from airline stocks when fuel prices were high. But the people who actually pay the fares are still being left out.

“In the short-term, the answer is: There really is no benefit for the consumer,” Jeff Klee, CEO of CheapAir.com, an California-based online travel agency, told The Guardian. “[A]irlines don’t price their flights based on their cost. In the short term, they price it based on demand.

“Unless demand changes, just because [airlines are] paying less [for fuel], they’re not going to pass that savings on unless they have to,” Klee said. “And they don’t right now. People are traveling and the flights are full.”

That view isn’t universal, though. For example, the International Air Transport Association (IATA), a global airline representative, says air fares are likely to drop by 5.1 percent in 2015 from the previous year. And that’s backed up by Orbitz.com, the Chicago-based travel website. So far this year, it says, air travel prices globally have dropped by 3 percent compared with the same period in 2014.

But none of the savings comes from the four major American airlines left standing. And that has consumer groups demanding that lower fuel costs be passed on to customers.

“We have seen six months of steadily dropping [fuel] costs,” said Paul Hudson, president of FlyersRights.com, in a letter calling for lower fares. “By any measure, the money saved by airlines should be reflected in lower airfares.”

Bijan Vasigh, Professor of Economics and Finance at Embry-Riddle Aeronautical University in Daytona Beach, FL., says it’s too soon to forecast the direction of air fares for this year, but adds, “I’m not really optimistic.”

The key, Vasigh says, is competition, something that is supposed to be at the very core of a free market. But as long as flights are full, at least on US airlines, he says, there’s no incentive for them to cut prices, regardless of the price of fuel. By Andy Tully, Oilprice.com

And this is how Wall Street’s promise of “Escape Velocity” has become a joke. Read… US Economy Heads Toward Zero Growth in Q1

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  4 comments for “Airlines Keep Fuel Savings For Themselves

  1. Michael Gorback
    Mar 26, 2015 at 8:08 am

    Is this Wolf Street or Obama Street? What happened to supply and demand? Is it illegal or immoral to charge what the market will bear or do we now have “airfare justice”?

    I was able to find a vendor for my supplies that significantly cut my costs. Am I obligated to lower my fees or do I get to benefit from my improved margins?

    Profit margins for the industry are under 1%. A quick search showed that airlines made 21 cents per passenger in 2013 and in 2014 the stories were citing 4-6 cents.

    Fuel costs tripled between 2000 and 2012. Fuel is one of the largest expenses, running about 1/3 of total overhead. In addition, the industry is heavily taxed.

    One of those greedy “big four” – American – was in Chapter 11 until 2013.

    When oil prices go back up will these same whining people send checks to the airlines to cover their losses?

    It’s business. Get over it.

    • Mar 26, 2015 at 11:49 am

      Ah yes, the glorious effects of an oligopoly … not quite what an outright monopoly has to offer, but still.

      • Michael Gorback
        Mar 26, 2015 at 4:03 pm

        An oligopoly that has less than a 1% profit margin is pretty pathetic, wouldn’t you say?

        • Mar 27, 2015 at 1:24 am

          There was a time when it was really tough out there for airlines, when they had to compete on price, and price only. And all major ones (except Southwest) went bankrupt. But now it’s a different story. Erstwhile bankrupt Delta, for example, made a combined $12 billion in net profit over the last three years (2012,2013,2014). Not too shabby. And the “adjusted, ex-items” profit they’re hyping to analysts would be much higher. I like competition. When mergers produce oligopolies, I get worried.

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