Drivers are enjoying cheaper gas at the pump because of tumbling oil prices, but airlines say customers shouldn’t expect to see fares decline as much. In Atlanta, in fact, they could pay more.
Airlines have long been quick to raise fares or add fees in response to rising fuel costs — among their biggest expenses — but not always so quick to cut them when those costs fall. Now, with oil prices at their lowest level since 2009, the industry cites supply and demand as the big driver of pricing.
“Customers ultimately determine pricing and vote with their wallets every day about what they value and are willing to pay for,” industry group Airlines for America said in a written comment about why fares aren’t following gas prices downhill.
There’s another factor at work now as well, however: Fewer big airlines due to mergers at a time when the growing economy is driving healthy demand. Add it up and the remaining major U.S. carriers have plenty of customers jockeying for their seats — allowing airlines to keep fares high and seats full.
“There’s no incentive for them to discount when they have full seats,” said FareCompare.com CEO Rick Seaney.
In fact, lower gasoline costs may help airlines keep fares high. That’s because lower prices at the pump leave more money in consumers’ pockets, allowing them to travel more, which drives increased demand for airline flights.
And even when fares decline due to increased competition or other factors, fuel costs are only a portion of an airlines’ expenses, so fares don’t decline at the same rate as fuel prices do.
Meanwhile, investors are pushing airlines to hold onto all of the benefits of lower fuel costs, rather than passing the savings onto consumers.
Atlanta-based Delta Air Lines told investors last month that its fuel cost savings could be worth $2 billion in 2015. That helps boost the airline’s profits, with an expected pre-tax profit of $4 billion for 2014 and more than $5 billion for 2015.
“It’s wonderful that fuel has run down. We love it,” Delta CEO Richard Anderson said during the company’s investor day in December. “There’s a $2 billion opportunity out there if we hold fare levels constant…. When [the fuel price] comes in lower, hang on to all of it. That’s kind of our philosophy.”
Gary Kelly, CEO of Southwest Airlines, Delta’s top rival in Atlanta, said the airline cannot count on low oil prices in the future.
When asked recently why the airline couldn’t increase fares if oil prices rise again, Kelly said, “you can go back to 2008, there was a very sharp spike in energy prices. All the carriers tried to raise fares,” and some went bankrupt, he said. “What I would not want to do to customers is take them through that same volatile ride with fares. Lower them one day, raise them the next day.”
U.S. Sen. Charles Schumer, D-NY last month called for an investigation into high air fares despite declining fuel costs, asking whether it is being driven by recent mergers and less competition.
Over the last several years, all of the nation’s biggest airlines have merged: Delta-Northwest, Southwest-AirTran, United-Continental and American-US Airways.
“Now you basically have four airlines that control almost 80 percent of all flights in the U.S.,” Seaney said. “So now we’re going to finally test that this year.”
Fares down a bit
Fares are down a bit nationally. The U.S. Labor Department’s consumer price index for air fares shows a national decline of 3.9 percent year-over-year for November — a period when gas prices dropped 10.5 percent. A study by the Airlines Reporting Corp. and Expedia forecasts 2015 air fares in North America to drop slightly overall.
The same study said fares in Atlanta are expected to rise slightly this year. Hartsfield-Jackson in the past couple of years has had some of the biggest increases in fares in the country as Southwest cut back on flights at Hartsfield-Jackson International Airport, reducing competition against dominant Delta.
Still, lower fuel prices may keep fares from going higher. And fares still fall during slow travel periods — including the next several weeks.
With airlines trying to drum up business during seasonally-slow periods, “you’re seeing lots of sales,” Seaney said. Still, fares are expected to climb back up for the busy travel periods of spring break and summertime.
Air fares and fuel prices sometimes move in different directions because months pass between the moment fuel is bought, the time many of the tickets are sold and the date the plane actually takes off. That’s because advance fuel contracts known as hedges are often struck months or even years in advance to cover a portion of airline’s fuel usage — which turn out to be bad bets when locked-in prices turn out to be too high.
But airlines also buy some fuel at daily market prices, and worry that if they sell fares based on low fuel prices months earlier, those prices could rise by the flight date and make the operation unprofitable.
Although airlines still levy international fuel surcharges, strong competition overseas is also expected to lead to some international fare decreases, with the International Air Transport Association forecasting a 5.1 percent global decline in average air fares, excluding taxes and surcharges.
Still, the least price-sensitive customers — business travelers — should expect price increases in 2015, according to the American Express Global Business Travel Forecast released in November.
Other prices hold
Prices for other goods and services have also not mirrored the decline in oil prices, though it has helped to keep a lid on inflation. Food prices rose slightly every month from from July through November 2014, according to the U.S. Department of Labor’s Consumer Price Index for urban consumers.
Other businesses such as Sandy Springs-based UPS, have different ways of addressing the change in fuel costs. UPS uses index-based fuel surcharges, which have declined since June as oil prices dropped.
Delta and its shareholders have reaped the benefits of lower fuel costs, with its December quarter fuel price per gallon down more than 12 percent compared with a year ago, along with generally good industry conditions and the airline’s strong performance. Delta employees will get a combined total of more than $1 billion in profit sharing for 2014, while shareholders are getting about $1.35 billion combined from dividends and share buybacks.
But Airlines for America says the savings for the company is still good for consumers, because carriers are investing more in planes and amenities.
Employees may also want to continue to take part in the benefits of lower fuel costs, said Georgia Hobica, founder of airfarewatchdog.com. “They’re trying to get pay increases,” Hobica said.
Airlines will “put their money to other uses,” Hobica said, “because there’s no great pressure to return it to passengers.”
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