Two months ago oil reached the level it had been at in November 2014 — which itself was one-third off its May 2011 high. However since then the price of oil has been falling — down about 20% in the past two months.
Oil prices began falling within days of US airlines raising checked bag fees claiming this was due to high fuel prices.
While it’s certainly true that higher costs means airline executives feel pressure to do something from Wall Street, that’s not the reason to raise prices. Airlines are more advanced than most industries in charging each customer a price as close as possible to that individual’s willingness to pay. They do that regardless of cost because it’s a profit-maximizing strategy. You’re just supposed to not mind because their costs are up.
In other words, if a given change increases revenue that’s what an airline is trying to do anyway whether costs are up or down. Costs are going to affect supply more than demand, at least outside of markets like Houston.
Though airlines don’t base prices on cost, exceptionally cheap fares are possible because marginal costs of an additional passenger are near zero and seats that would otherwise go empty can never be sold again once a plane takes off, they’re spoiling inventory.
Oil prices are volatile,
Six times since 1987, oil prices have increased 100% or more YoY. And several times prices have almost fallen in half YoY.
Some airlines hedge their fuel costs, however that comes at a cost and airlines haven’t been very good at it losing billions of dollars. Delta’s Vice President of Fuel even turned out to be frontrunning his own trades.
We aren’t going to see a rollback of cuts or fees just because fuel prices have fallen, just as we didn’t see checked bag fees fall when the price of oil dropped. After all checked bag fees are as much about tax avoidance as generating incremental revenue for the airline.
But we don’t have to be sympathetic to the challenges airline executives face at $60 a barrel oil, either. And indeed even if oil prices shoot back up, executives may feel pressure to overcome inertia but they are pricing to demand and not cost anyway so feel free to shrug your shoulders at the fuel excuse.