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According to the Bureau of Labor Statistics’ monthly Consumer Price Index (CPI) publication from August 19, 2015, average airfares dropped 5.6% in July, the steepest one-month drop in nearly 20 years. The report takes into account “regularly scheduled domestic and international commercial airline trips on certified carriers departing from each of the 87 cities in the CPI sample.” Trips designated as business travel are excluded from the calculation.
Placing the decline in even starker relief is the fact that the overall CPI rose 0.1% in July, and has risen 0.2% over the past 12 months. So what’s responsible for the decline? Likely it is due to lower oil prices, which we began to see late in 2014 through early 2015.
In fact, earlier this year, the contrast between falling oil prices and rising airfares and record airline profits was so sharp for a while that Senator Charles Schumer of New York began calling on the Justice Department and the Department of Transportation to investigate airfare pricing back in December, and is still asking for it.
When fuel prices do change, it usually takes between six months to a year for consumers to feel the effect. That is partly because airlines hedge fuel prices that far into the future, so a drop in pricing today means they are buying fuel at that price several months from now. It also takes some time for airlines to add new capacity, planes or routes depending on future fuel-cost forecasts. Part of Schumer’s complaint, however, is that airlines often raise airfares immediately when oil prices rise, while waiting several months to lower them when prices drop, representing an unfair burden on consumers.
Less Competition, Higher Demand
This Slate article points to the fact that four US Airlines — American, Delta, United and Southwest — now account for about 80% of domestic airline capacity, whereas 10 years ago that capacity was spread out among 11 carriers. That means there is much less competition in the skies and less pressure on airlines to keep fares low.
Not only that, but airlines have seen little incentive to slash fares, even with falling fuel prices, because demand has been so high. According to the International Air Travel Association’s latest release on passenger demand from August 6, airline load capacity (the percentage of seats airlines are selling) was 81.1% overall.
North American carriers reported 84.9% load capacity and European carriers reported 84% load capacity. Middle East and Asia-Pacific airlines’ load factors were not quite as high, but that was mainly due to added capacity from more planes and routes coming online.
The strong demand might be the result of consumers saving money on gas thanks to the low oil prices. They then have more money to spend on other things, including airfare, and we might even see those load factor numbers rise as the figures for the rest of the summer travel high season become available.
Will it continue?
At least the savings from lower fuel costs, as well as price hedging and capacity airlines have added due to lower prices, finally seem to be hitting the market. Airfares are finally dropping, and some analysts predict that fares will continue to fall for several more months. That’s good news overall, but keep in mind that, while the drop in airfares was 5.6% last month, the drop in jet fuel prices over the past several months was nearly 40%.
So what are your best options for taking advantage of the savings? If you can, fly routes where there is competition between at least two carriers and avoid regional airports where your flight options are limited. On heavily competitive routes such as the transcontinental New York-Los Angeles corridor, consumers have come out ahead over time thanks to newer planes and better amenities. Airfares have actually remained fairly constant over several years on this route, and even dropped in premium cabins.
Hopefully, we’ll also start to see more competition internationally as well, including from the growth of low-cost carriers such as easyJet and Ryanair, and from the Middle East carriers, like the recent fare sales on Emirates from New York-Milan for $499 that forced Delta and Alitalia to match its prices.
What has your experience been? How have airfares you’ve purchased lately compared to previous months and years?
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