Now that Fuel Prices have Dropped will Air Fares Follow?

In recent weeks we have seen a dramatic drop in fuel prices. You and I have noticed it mostly at the gas pumps where near $4.00 per gallon prices have dropped to substantially below $200. Now that fuel prices have dropped will we see a similar drop in air prices?

The reality of the airline industry is that the airlines are still in trouble. For years, competition prevented the airlines from raising prices, at least domestically. You’ve seen it or heard it in the news – one airline raises their rates, a second matches it, but no body else does. So, a day later the fares drop back. While international rates have been consistently increasing at a rate of 7 to 8 percent per year, domestic rates have stayed flat for the same period.

With the increase in labor costs and other costs, this put the airlines in risky financial territory. As a result, every major airline has been in bankruptcy, except American Airlines; and even some of the low cost carriers, such as Frontier and Sun Country*, have gone into bankruptcy.

The dramatic increase in fuel prices was almost the straw that broke the industry’s back. No carrier had in their business plan fuel prices based on the size of the increase we saw this past summer. Airlines went from labor being their greatest cost, to fuel becoming the greatest cost.

With the increase in fuel prices, the airlines were forced to find new ways of increasing their revenue. They have gone to al-a-carte pricing, where you pay extra for specific seats or for advanced seat assignment, for checked luggage, curb side check in, and other services that formerly were included.

Another way the airlines have increased their revenues is the slash costs. Last fall the airlines overall did a 10 percent cut in capacity. For most airlines, this was a cost cutting measure that allowed them to remove older gas guzzling airplanes from service. It also resulted in fewer seats in the air. Since the airlines limit the number of cheap seats on each flight, this resulted in increased prices. Many airlines have announced another 10 percent decrease in capacity to occur after the first of the year. This will result in even fewer seats flying in the air and we can surmise that this will drive prices even higher.

Today the airlines are flying at average capacities in the 90 percent. In the past 65-80 percent was considered good. Now that fuel prices have dropped back to something they can handle, they are finally beginning to see possible profitability again.

Will they drop prices? Let me as you this. If you were the CEO of any carrier, saw your flights flying in excess of 90 percent capacity, had fuel prices finally under control, and were projecting a profit for perhaps the first time in years, would you drop prices? There is no motivation for the airlines do to that.

No, I think we can expect air prices to continue to be at higher rates. There may be the occasional sale, but we won’t see a permanent drop.

There is good news on the travel front. With the decrease in air capacity, hotels and resorts are hurting and dropping prices. In some cases the saves can make up for the difference in the air. So, don’t get discouraged by the air and stop there. Look at the entire package cost.

* Sun Country has other problems besides just the economic situation of air fares and fuel costs, but that’s for another blog.