With Fuel Down 20% Airlines Can Shut Up About the Price of Oil

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.

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 InsideFlyer.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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Comments

  1. Yup, not a peep about oil on the way down. Not even a thank you.
    It is very apparent that airline execs pander to investors and not their customers.

  2. The airlines just migrate their language from that of fuel surcharges to that of carrier surcharges or something like that when or before fuel drops down, and the customers end up paying the price for it even as fuel prices fall.

    And when fuel prices go up again, the airlines just migrate their language back to that of needing to charge customers more for fuel and use that as an excuse to hike up the costs for customers. And yet again the customer end up paying the price for it whether or not fuel prices fall.

    I can’t wait until airlines’ bigger concern ends up being with passenger numbers dropping more and faster in total than with the movements in the price of fuel. Then the airlines will have the problem which they really deserve to have and which the consumers need the airlines to have.

  3. Ohhh Gary I love your posts but I do not like the title of this post “With Fuel Down 20% Airlines Can Shut Up About the Price of Oil”.

    You know better than saying the 20% decrease in oil directly translates to a 20% decrease in fuel price. You have more business savvy than that. The price of oil in only 1 factor in fuel price.

    Yes it greatly helps but…….

  4. If you want lower fees, just have fees taxed at double the rate of tickets. Airlines will trip over themselves to end fees immediately.

  5. @Christian, I don’t see the reason for having fees taxed at double the rate of tickets, and you may have been exaggerating here to make a point. I don’t want to see the government intervening to destroy the business models of the LCCs. That would ruin what little meaningful competition is left in the U.S. domestic market, since the legacy three do not compete, but simply copycat each other’s bad for the consumer ideas. I would, however, tax “surcharges” like the misnamed “fuel surcharges” that the customer cannot avoid at the same rate as tickets. Those fee for service elements that consumers can choose to use or not use (bag fees, seat fees and the like) would be taxed, but at a lower rate, something along the lines of a typical sales tax rate.

  6. @DaveS – On the surcharges, we’re in agreement. On the fees, I see your point, but think that the fees should be taxed at a minimum of the same rate. Otherwise, they just become mechanisms to evade taxes.

  7. “Crowned prince”.. that would be a king, FYI. A crown prince is the term you’re looking for, in this instance a murdering one. But that’s lost on someone like you.

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