MIAMI — With the summer arriving, those of you who frequent the gas pump might have noticed something a bit peculiar since this time last year: a steep and welcomed dip in the price of filling the tank. A fall in the price of crude oil globally has translated into big savings for drivers for months now. But while the price of gasoline has responded fairly elastically to the price of oil, airfares have exhibited much more staying power, lacking the same downward momentum as gas prices.
Many consumers call into question the unresponsiveness of airfares to the price of oil, charging airlines with accusations of intentionally gouging fliers nationally. The discussion has even reached Capitol Hill, with Senator Charles Schumer demanding a federal investigation of U.S. airfares back in April and now with the Department of Justice conducting such a search. However, this would represent a governmental misstep. Airlines price their tickets according to the laws of the free market, not on a cost-plus basis. Even given trimmed costs, the airlines owe fliers no discount.
Most principally, airlines price airfares according to supply and demand. Generally, the demand for air travel dictates what airlines may charge. Economic logic suggests that either a spike in demand or a reduction in supply will increase the price of a good; conversely, suppressed demand or more abundant supply will force the price of a good downward. The input costs to producing a good hold no gravity in determining its price. Nonetheless, some consumers still expect airlines to adjust the price of a ticket in response to changing input prices.
Mandating that an airline price tickets according to the price of input goods is both unreasonable and dangerous. For one, according to the International Air Transport Association, jet fuel constitutes only around 30-percent of the cost required to support a flight. Airlines also bear significant fixed costs and other variable costs that dominate the total bill associated with a ticket. Even a relatively dramatic fall in the price of oil translates into much less awe-inspiring savings for an airline. Clamoring for drastically cheaper airfares ignores this fact.
In addition, most airlines engage in some level of fuel hedging, which protects them against potential volatility in the price of oil. Many sign multi-year agreements that buffer increases or decreases in oil prices, offering airlines more clarity in predicting costs. However, this also means that on the rarity that oil prices fall, airlines realize only a portion of the savings. Many airlines, as a result of these contracts, currently pay above market rates for jet fuel, even though these prices are lower than a year ago. How can one fairly expect that airlines pass on savings from which they don’t fully benefit?
Airlines also lack the capacity to pass on increased costs to the consumer in most cases. Fuel prices, which cleared $100 per barrel, soared in the opposite direction during 2008. But airlines could not accordingly raise airfares due to the maimed national economy. Would consumers have preferred to tie airfares to costs during this time of economic despair? If we criticize airlines for raising the price of a ticket when input costs start trailing upward, we cannot then expect that they respond elastically once they begin trickling downward again.
The domestic economy boasts far more health than in the depths of 2008. Yet, despite what those who lament the industry as oligopolic would like to believe, fares in fact have been slightly pulled downward even with the more robust demand. Upon closer examination, the idea that airlines individually wish to simply gouge the consumer and hoard profits holds little merit. While lower oil prices have supported profits, airlines have put this money to use, employing profits to invest in infrastructure that betters the overall passenger experience. In addition, many airlines have returned money to the pockets of their shareholders, compensating investors with regular dividends.
Fares, while falling disproportionately to the price of oil, remain historically low. Data from the Department of Transportation (DOT) show that adjusted for inflation, airfares fell 14-percent in the last twenty years. Overall, flying remains an extremely affordable method of travel. Airlines continue to face competitive pressures that prevent them from unfairly raising the price of a ticket beyond what the market dictates.
Some choose to cite a wave of recent mergers as evidence that airlines cooperate to raise airfares as high as possible and to maximize profit. But this assertion flies directly in the face of broad airfare trends. While consolidation may result in less competition on a few select routes, financially rejuvenation and stability allow carriers to more forcefully compete for customers across their entire route networks.
In addition, the emergence of ultra-low-cost carriers (ULCC’s) in the industry undercuts the ability of legacy carriers to balloon prices at will. ULCC’s compete intensely on the basis of price, routinely offering cheap fares that inhibit a competitor’s ability to charge significantly more for a ticket. Spirit and Frontier, two notable ULCC’s, minimize costs by unbundling practically all elements but the right to a seat itself from the airfare. While ULCC’s offer a different product from full service carriers, the mere availability of extremely cheap fares effectively caps the price tag all airlines can place on their tickets.
Likewise, when gasoline prices tail off, alternative modes of transportation become more viable options. Driving, for instance, becomes less expensive, encouraging consumers to abandon the skies for the roads. In order to retain business, airlines of all stripes must continually compete with the consumer’s car, limiting how much each can charge for an airfare.
In demanding that airlines adjust ticket prices downward on the basis of cheaper oil, consumers want it all. While the desire for lower airfares on the part of fliers is completely understandable, the expectation that airfares fall is equally unreasonable. At the end of the day, they, as businesses, function for the purpose of making money. Airlines hardly owe you lower fares.