Why Are Airfares Rising When Fuel Prices are Going Down?

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.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community Milepoint.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Apart from the fact that fuelsurcharges are, as you mentioned, basically just another way to bring in money, an airline typically has it’s fuelcost hedged for 1-2 years (depends on the airlines policy and strategy).

    So while fuelcost is a very substantial part op operational cost (30-40-50%!) oil price changes only show up in the longer term. The last few months most airlines did pay more or less the same as a year ago for their fuel (the same would apply if the oil price would have gone up of course).

    How an airline hedges its fuel cost is more important to it’s bottomline then ticketpricing. Delta even has it’s own refinery to be able to keep fuelprices as much under control as possible (there’s also speculation, politics, refiney shutdowns and seasons/weather involved).

  2. I’m not generally in favor of additional regulations on pricing and similar practices, but I think the fuel surcharge thing is absolutely inexcusable and should be made illegal. Airfare should be priced as a fare + gov’t-required taxes and fees. I don’t care about baggage fees, seat assignment fees, etc. But there should be only one box of airline-imposed charges for the very basic thing you’re buying: transportation for yourself from AAA to BBB. And if an award ticket is supposed to be a free fare, that should include everything but what non-airline entities are charging (e.g. taxes, airport fees, etc.).

  3. It’s a way to fight Obama’s “War on Fliers”—higher prices in economy so that the Obama-ites won’t fly. When the next recession comes in, the prices will come down. Indeed, airlines are over-taxed, not just what’s passed down to the consumers. When that’s shoved away, including that ObamaCare (aka: O’bolaCare) crap, airlines can increase capacity and higher more workers.

    The “fuel surcharge” is relatively a new thing when oil jumped in 2007-2008 to $147.11. Now, oil is going back to $40.00 (it’s $83.00 now), thus the airlines have to get as much profit as possible from the hedging of the higher oil price until it expires.

    Last decade, only Southwest was making massive profits because they were able to hedge their fuel to $50.00 a barrel, when the legacies were paying $110.00.

    The #1 and #2 costs for airlines is 1) Fuel. 2) Employment costs. O’bolaCare is scheduled to make #2 to become #1; hence, higher fares.

  4. Consolidation/lack of competition is the biggie. It was an utterly predictable result. It’s price fixing really when you get so few players that’s practical for all parties to have a gentleman’s agreement to choke supply by parking airplanes to artificially increase the value of a limited supply of seats. I can’t imagine that anyone would have predicted anything else…

  5. The price of airfare (like everything) is determined by both supply and demand. Fuel prices effect the supply-side, but I believe that the driving force is on the demand-side.

    Even though it is still a tough economy for most people, businesses are doing just fine. The stock market is near record highs, and companies have more money on their balance sheet available for business-travel. Business travelers are notoriously ignorant of the airfare prices they pay, which allows airlines to charge more.

    Obviously the leisure traveler gets pinched more than anyone, and it’s a good microcosm of how our broader economy is working right now. It’s tough to pinpoint why corporations are doing so much better than the little-guy right now (especially with a Democrat in the White House), but my amateur opinion is that it’s caused by the Fed’s monetary policy.

  6. Always hilarious to see the racist Obama haters chew their legs off in the public square.

    Anyone who travels around the world realizes that except in Muslim extremist and American redneck quarters he is well respected as the hope for America to right itself. But decent people worldwide know that there is no greater obstacle to US potential than its unevolved rednecks, scourge of civilization.

  7. “O’bolaCare”? Really? Obama’s hardly been the best president, but blaming him for Ebola seems a bit much!

  8. Ed is hardly paranoid.

    From CNN: “John Kerry: Climate change as big a threat as terrorism, poverty, WMDs” Feb 17, 2014

    This has been part of Obama’s basic ideology from before he was first elected.

    Politico quotes Obama from an interview with the Chronicle in 2008:

    “Uttered in 2008, still haunting Obama in 2012″

    “If somebody wants to build a coal-fired power plant, they can. It’s just that it will bankrupt them,” Obama said, responding to a question about his cap-and-trade plan. He later added, “Under my plan … electricity rates would necessarily skyrocket.”

    Of course, cap and trade is long dead. But coal-fired power plants are powering down nationwide, and they are blaming the Obama Environmental Protection Agency. The president’s critics say proposed greenhouse gas regulations for future power plants are designed to cripple the coal industry.

    And just like with another 2008 quote — Energy Secretary Steven Chu’s famed call to “figure out how to boost the price of gasoline to the levels in Europe” — Republicans say the Chronicle clip shows what’s really in the president’s heart, that high electricity prices and the death of coal have always been Obama’s goal.”
    ,,,,,,,,,,,,,,,,,,,,

    And of course, if GW is a huge threat, part of the remedy has to be to reduce the amount of flying the general public does. Flying by Government employees, and anti-GW activists like AlGore, somehow is non-harmful. But flying by the “little people” is a huge threat and must be reduced by high prices.

    It’s not a huge jump from ‘under my policies electricity prices will skyrocket’ to under my policies airfares will skyrocket.

  9. @Pat — corporate is doing better due to shedding a lot of inefficient workforce in the recession, and either realizing those people were not needed in the first place, or replacing them with automation…..or even making the remaining workers do more for fear of being unemployed.

    I’m sure the generous corporate tax breaks from our least bright president W help a lot too.

  10. “Anyone who travels around the world realizes that except in Muslim extremist and American redneck quarters he is well respected as the hope for America to right itself.”

    ROTFLMAO !

    Interesting how people incapable of rational discussion instinctively hide behind pejorative ad hominem epithets like racist and redneck.

    Apparently many of those racist rednecks are Democrat voters. From Reuters yesterday:

    President Barack Obama made a rare appearance on the campaign trail on Sunday with a rally to support the Democratic candidate for governor in Maryland, but early departures of crowd members while he spoke underscored his continuing unpopularity.

    With approval levels hovering around record lows, Obama has spent most of his campaign-related efforts this year raising money for struggling Democrats, who risk losing control of the U.S. Senate in the Nov. 4 midterm election.

    Most candidates from his party have been wary of appearing with him during their election races because of his sagging popularity. In fact it’s gotten so bad that Democrat Senate candidates Alison Grimes and incumbent Democrat Senator Mark Begich are refusing to publically answer whether or not they voted for Obama. (Google: ANOTHER Senate Dem Candidate Refuses To Say If They Voted For Obama) So I guess they must be racist rednecks too. 🙂

  11. Wow Greg, pot-calling-the-kettle-black much?

    You know who is just as inrtolerant as “racist red-necks?” Obama apologists who label EVERY criticism of this, at best, very average President as racism. As always, over use of a term leads to that term losing all meaning.

    Also, I spend plenty of time outside of the USA and your portrayal of the rest of the worlds impression of Pres Obama must be from 2008, before he crushed all of our hopes that his Presidency would be different and better. It ‘s not.

  12. When did this become Free Republic and DailyKos mashed into one…comments around here becoming no better than Yahoo! lol

  13. Save your concern trolling Buford. Modern people know exactly who it is who generates the O hate. I’ll bet you have black friends too, huh, and don’t even know its a punchlin! LMAO

  14. So if one dislikes Obama they are automatically racist? What about all those that dislike Bush, are they racist too? And if they dislike Michelle Obama they’re sexist? Sexist AND racist?

    This lunacy must stop, it’s getting way out of hand.

  15. Gary, Please explain your definition of the industry being quite competitive when you admit that prices are unrelated to costs and capacity is being artificially restricted. Thanks to things like fuel surcharges the airlines could and should lower fares. Your description of the airline industry makes it sound like a cartell.

  16. @john – there are few barriers to entry. there are multiple participants contesting the market. inflation-adjust prices remain below their level of 30 years ago.

  17. Gary, The items you mentioned are false or they conflict with your original premise . First, barriers to entry are high to be able to compete with the big four precisely because of things you mentioned including limited availability of gates and takeoff and landing slots. Not only that but current players like Alaska Air, IMO the best airline out their, with a good balance sheet and record of profitability are fighting for their existence much less expansion. Second, the ability to maintain capacity limits in spite of a substantial gap between cost and price signals that airlines are not acting as competitors. Third, you admit as much when you state that airlines do not compete aggressively. Competition is an aggressive endeavor not something to be done only for convenience or to drive others from the market. I been travelin or would have responded sooner.

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