Yes, Oil Prices Are Down. But Don't Expect Your Plane Ticket to Get Cheaper
It has been a rough several months for airlines, mainly due to the recent rise of the cost of fuel.
Earlier this year, airlines' fuel costs were at their highest in years. Jet fuel was up 50% year-over-year during the summer, and in October it jumped about 33% compared to the same month in 2017. Fuel is, for the most part, airlines' second largest cost overall. And the added pressure of oil prices has brought some low-cost carriers, like Wow Air, to the brink of shuttering operations for good.
Now, airlines' bottom lines might get a break. The price of oil has been rapidly plummeting. November was the weakest month in 10 years for US crude prices, which dropped 22% in the last 30 days. Theoretically, this price plunge would save carriers millions of dollars.
That leaves air passengers around the globe with the same burning question: Shouldn't airfares get cheaper?
Well, not exactly. It is a complicated issue, but according to aviation economists, don't hold your breath for that cheaper plane ticket.
More Pricing Factors Than Meet the Eye
When it comes to jet fuel prices and airfares, many flyers think that as fuel prices drop, airlines pay less for fuel, meaning that the price of airfare should drop, too. That is logical, but airline ticket pricing models are actually much more complex.
"There are a lot of variables in there," Alan Bender, aviation economist and professor at Embry-Riddle Aeronautical University, told TPG, noting that competition and capacity on certain routes are also two big determinants of airfares. But one of the most important pricing factors, he says, is whether airlines hedge on oil.
A hedge is a protective contract between an airline and fuel supplier. To guard against fuel prices unpredictably skyrocketing, airlines lock in current fuel prices by buying an insurance policy of sorts: a so-called hedge.
"What airlines typically do is they lock in current prices for a certain percentage of their fuel, and then they stagger them so they don’t all expire on the same day," Bender explains. "Airlines have no control over their second-largest cost [fuel], so they buy a long-term contract or hedge and set a certain price. But an airline has to have a lot of money to do that."
Most major carriers in the US have more than enough money to hedge on fuel (it's another story for low-cost carriers). Southwest historically hedges the most. Some, like American, prefer not to hedge at all. Delta took things to a new level and bought its own oil refinery in 2012, but that was widely regarded within the industry as a "boneheaded decision."
But the oil hedge contracts cut both ways. There are also disadvantages. "When fuel prices drop dramatically, there is a negative side for many airlines because they are locked in at a higher price," Bender says. "It's like going to Las Vegas."
This is likely a major part of the pricing phenomenon flyers are seeing now. Airlines could be locked in at higher fuel prices and can't pass any savings on to the customer.
Even if carriers do have fuel savings to pass on to the customer, they likely (read: definitely!) would not lower ticket prices.
Airlines Just Figured Out How to Pass Off Fuel Costs
Airlines aren't about to pass on newfound fuel savings to flyers because for the last several months, they have executed some fancy financial footwork to pass off fuel surcharges to flyers without losing customers.
Almost every major US carrier raised checked bag fees in 2018, most likely to offset high fuel prices. And major carriers were also raising airfares. This method was very successful for carriers like United and Delta — both of which said a couple months ago they expected to recoup almost all of the roughly $2 billion in extra charges spent on fuel so far in 2018. In fact, United president Scott Kirby said the third quarter, which had the highest fuel prices, was “one of the best revenue environments we’ve ever seen.”
Now that flyers are shelling out for more expensive tickets and airlines are making a nice profit, carriers are not likely to shake up that sweet situation. "Historically when we look at fuel prices, airlines quickly put on fuel surcharges," Bender says. "But when fuel prices drop, we don’t see refunds going back to the public."
Carriers also are making efforts to make the rest of their business models more flexible to change along with fuel prices in order to stay profitable even when oil spikes.
"There are many ways that airlines can do a nip and tuck here and there so if [fuel] prices do go up, they can cut routes that are marginal, they can replace their gas guzzlers with more efficient planes, they can put more seats on the plane as we’ve seen for years," Bender says.
"For airlines to remain competitive they have to add capacity add more seats add more routes, airlines are always trying to purchase more fuel-efficient aircraft. They can’t control fuel prices, but as we all know and suffer through, they can add more seats."
So the short answer is that, barring seasonal shifts in fares, don't expect to see plane ticket prices drop in any significant way. "Airlines can’t always pass on lower costs," Bender says. "But even more importantly, I think if airlines are doing well at current prices, why would they lower prices?"
But luckily for frequent flyers, Bender says he doesn't see airfares significantly increasing, either. By and large, he says, "flying has never been more affordable than it is now."
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