Fuel prices tumble, but fares, not so much

03/01/2016

There has been a downward trend in the price of oil, so dramatic in fact that it has affected world markets. The low price has been a stroke of luck for airlines, now facing some of the lowest fuel costs in many years. So why haven't fares been falling as quickly?

Just a few years ago, it was easy to blame fuel for just about anything that went wrong for airline passengers. High fuel costs were the reason that baggage fees took off. High fuel costs were the reason behind the elimination or reduction of many freebies that passengers used to enjoy, like snacks or meals. High fuel costs gave us fuel surcharges. So now that the cost has dropped to levels not seen in years, what have the airline been doing with all that money? For those hoping that cheap tickets would flood the market, there's a bit of a disappointment.

Granted, there has been a downward push on some airline fares due in large part to some competition from low-cost carriers as well as the end of the summer and holiday travel seasons. But with fewer airlines competing (due to mergers) and the willingness of the large carriers to selectively match low fares from the budget airlines only on routes they directly compete on, flyers from larger hub cities with only one or two airline choices haven't benefitted much from cheaper fares.

What many airlines have been publicly saying, however, is that they are investing their profits back into their companies -- ordering new aircraft or revamping their interiors. Some are upgrading their business class products with larger, lie-flat seats and more amenities; others are adding more seats in economy, with a good number of them being roomer "premium economy" seats that airlines can charge more for. Newer aircraft now feature larger overhead bins and better in-flight entertainment options. But for the flyers who choose their airlines and flights based on the price of the ticket, there is not as much activity.

Airlines are being careful with their profits. They are not expanding into new markets and adding more seats to routes just to be bigger than the other guy. They are being far more disciplined with how many seats they offer up for sale than they have been in the past. This capacity control is what keeps fares higher and load factors at record levels. Surely the temptation is there, but pressure from investors has kept this urge largely at bay.

Anyone who has followed the airline industry also knows that things happen in cycles. The good times won't last forever. Airlines could use their extra cash to pay down debt, order new aircraft, absorb some discounting due to competition and even stock up on cheap fuel for the future. But their employees are getting the wind part of that windfall too. Just as fuel has dropped from the largest to the second largest expense for the airlines, labor costs are set to rise. Employees long denied raises and other perks due to hard times are going to want their share in due time and this will put pressure on airline earnings for years to come. The bottom line is that passengers should not expect airlines to lower their fares for the sake of lowering them, but at least the elimination of those annoying fuel surcharges would be a very good start.