The price of crude oil is currently about $75 a barrel, sliding and sliding down since its high per barrel in April and June, 2014. Wow. This should be great news! And it should mean lower air fares. But it doesn’t.
According to InfoMine.com oil is down from its 52 week high of almost $115 a barrel. I may not be stellar at math but it appears that the cost of crude has dropped by about 2/3.
Of course, this means the price of fuel is dropping as we can see at the gas pump. Since the cost of transportation should be dropping we would expect that airfares should be dropping as well. For what is airfare but the cost of transporting people.
You’d think that, but you’d be wrong. In fact, airfares have been either flat– or rather high and flat – or going up. Huh?
According to an October 21st article in Time, by Bill Saporito “As one airline consultant told me about a year ago, the semi-romantics who used to run the airlines are long gone. Instead, the folks in charge today play hardball. They are running a business, not their advertising agency’s image of air travel.”
The reason is that supply and demand trumps the cost. The demand is high, the supply is purposely being constricted to keep those planes jammed-packed full and so, traveling public, the airlines are pocketing the oil bonus and making the planes even more crowded. Don’t let your jaw drop or it will hit you in your knees – given that the space is getting so tight there isn’t much room for joints except tucked in closer to your body.
The video with this article explains how the airlines are rocketing into profitability by keeping supply low. It’s a bit technical, but worth the listen.
I don’t want to single any particular airlines – they’ve all been reporting record profits for 2014.
According to Delta Airlines press release: Their pre-tax income for the September 2014 quarter was $1.6 billion, an increase of $431 million over the September 2013 quarter. And that’s just ONE quarter. The press release went on to note that for the full year, they expect a pre-tax profit in excess of $4 billion.
American Airlines financials echoed Delta. Third quarter 2014 net profit, excluding net special charges, was a record $1.2 billion, up 59 percent versus the third quarter 2013. And they expect a record profit for all of 2014.
Southwest Airlines also reported record profits.
If airfares won’t be going down, is there ANY upside for travelers?
Business Week writer Justin Bachman October 20, 2014 thinks there may yet be a benefit for us, even though it may backfire for the airlines.
The lower cost of fuel may encourage airlines to fly their planes in off-peak periods because of the low costs associated with those extra flights. A few additional flights on the weak travel days of Tuesday and Saturday could return to some schedules.
Thus, lower prices could cause airlines to “backslide on their new-found religion against deploying too much capacity.”
Remember supply and demand? If the lower oil costs stay, and flights are added, there is a teeny weeny chance the supply and demand ratio may possibly tip towards the traveler.
But don’t hold your breath. With the price of gasoline dropping, and the hassle of flying getting worse and worse, consider taking road trips.
That will surely affect the demand for seats on flying tin cans.