USA Today asks but doesn’t really answer the question of why airfares are going up even as fuel prices are down from their peak.
The answer is simple, though the story behind the simple answer is a bit more complex.
Airfares are high because planes are full. When airlines are selling most of their seats, they can raise prices.
Airfares aren’t really directly related to cost, they’re set based on the supply of available seats and demand for those seats.
Of course, the number of seats an airline is willing to provide at a given price point is determined in the long term by its cost structure, among other things (like how easy it is to access gates and planes, which is related both to cost, structural limitations, and government regulation).
So the interesting question is why the high prices haven’t induced more capacity into the system. Why aren’t airlines growing quickly as they have during good times in the past?
And that’s actually an interesting question. One story here would be that the airlines have learned from past mistakes. They know that as soon as they start adding capacity and competing aggressively they lose money. So even if their individual incentive might be to do so, they recognize as soon as they do they’ll eliict a competitive response from other carriers.
Another piece of this may be industry consolidation — but not in the usual way people think.
The industry is still quite competitive, but with fewer players there are fewer outliers well-positioned to burn cash on foolhardy expansions that historically have tended not to work. In other words, mergers have meant fewer outlier airlines making foolhardy business decisions that take down the rest of the industry with them.
For whatever reason, the number of seats hasn’t grown as quickly as the demand for those seats, so price has gone up.
What is really egregious, though, is that fuel surcharges haven’t fallen as fuel prices have fallen.
This doesn’t really matter on paid tickets for the most part. Fuel surcharges are a convenient way to raise and lower all fares in a market by a mixed amount without having to refile each fare. And they can change prices in a way not subject to percentage off discounting agreements.
They really matter on awad tickets for those frequent flyer programs and airlines where fuel surcharges are added to the cost of an award ticket along with taxes, on the theory that the miles pay for the bare fare only.
It’s a pure money grab that is justified on the price of fuel. But if that’s the narrative, then the surcharges should fall when the price of fuel falls. Or the name of the surcharge should change because the lie has been proven, that it is not an extra fee to cover the high price of fuel, it’s an extra fee because airlines have consumers more or less locked in with their balances — consumers cannot spend British Airways miles except by going to British Airways and paying whatever the going rate British Airways declares. And British Airways believes it makes more money this way.
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