Over the past 12 months, the price of crude oil has jumped 50%, with jet fuel costs tracking close behind, at 46%, according to data IATA compiles from the commodities market analyst S&P Global Platts.
Airfares have not followed suit.
As of the end of April, fares in the U.S. were down 6.9% from a year earlier, according to Consumer Price Index data released by the Department of Labor last week. And while prices did increase 2.4% in raw terms between the end of March and the end of April, that increase is something of a mirage. Once adjusted for the usual seasonal increase in airfares between March and April, prices were actually off 2.7% in relative terms.
The rising cost of fuel, coupled with airfares that haven’t climbed, is taking a toll on some carriers. For example, American reported net income of $186 million in the first quarter, a 45.2% drop year over year, driven in part by a $361 million (26%) increase in American’s fuel prices. Other carriers fared better year over year in the first quarter. United saw a 48.5% jump in net income, while Delta saw a 2% decline. Still, they spent 26% and 25% more on fuel year over year, respectively. Southwest, the only one of the big four U.S. carriers that is still purchasing fuel hedges, enjoyed a much smaller fuel cost increase of 6.5%
Historically, changes in the cost of airfare lag several months behind significant increases or drops in the cost of fuel, something American CEO Doug Parker seemed cognizant of last month when he predicted rising airfares and a slowdown in the pace of capacity growth in coming months.
“If indeed this is where fuel prices will stay, I’d expect you’ll see higher costs to consumers over time,” Parker said on American’s quarterly earnings call.
And despite April’s decline in airfares, there are indications that the tide could be turning. Two weeks ago, for example, Spirit introduced a $3 fare hike, which, according to a note by stock analyst Helane Becker of Cowen Research, was matched by competitors. The carrier also scaled back capacity growth plans slightly, but not until after the summer flying season.
If President Trump’s decision last week to pull the U.S. out of the Iran nuclear deal and to reimpose oil sanctions on Iran results in a lasting bump in prices — crude oil was slightly more than $71 per barrel last Thursday — that, too, could drive airfares higher. But the European Union isn’t expected to take part in the sanctions, and as Platts noted in an analysis, compliance with the unilateral sanctions could be difficult to enforce.
Parker’s prediction aside, airfare experts expect only modest price hikes as the summer plays out.
When asked if he thought airfares this August would be more than airfares last August, George Hobica, president of Airfarewatchdog.com, said, “We may be talking $5 to $10 on average for domestic fares.”
Hobica added: “International will stay low. There is just so much more competition and options. You can go through Dubai. You can go through Qatar. You can go through London.”
Hopper, a flight search app designed to predict when fares on specific itineraries will bottom out, projects that airfares during this summer’s peak period will be 1% higher than they were last year, chief data analyst Patrick Surry said.
Surry noted two reasons that airfares aren’t likely to track upward in tandem with fuel costs, at least in the short term.
The first, he said, is that when fuel prices plunged from more than $100 per barrel in 2014 to as low as $28 per barrel in 2016, airfare drops were far less dramatic. That left airlines with wiggle room to keep prices low and continue earning profits, even as fuel climbed back around $70 per barrel.
The second is a competitive environment in which low-cost carriers are expanding aggressively, both domestically and abroad. The U.S. discount carriers Allegiant, Frontier and Spirit grew a combined 15% over the past year, according to Hopper.
“Unless there is a really dramatic shift, the way the competitive environment is, it’s hard to imagine the prices will spike,” Surry said.
Nevertheless, he cautioned that airfares might also bottom out as higher jet fuel expense eats away at that wiggle room and the European market continues to undergo consolidation.
Hobica more or less shared Surry’s view.
“I think prices will go up, but I don’t think they will go up drastically, because airlines are just too afraid of losing customers,” he said.
Still, both analysts said that airlines’ increasing reliance on ancillary fees could make ticket-price data misleading. According to the airline consulting firm IdeaWorks, carriers around the world earned an estimated $82.2 billion in ancillary revenue in 2017, up from $67.4 billion a year earlier. As a share of overall airline industry revenue, ancillaries jumped from an estimated 9.1% in 2016 to an estimated 10.6% in 2017.
“The sense we have is that ticket costs stay flat, but we have the increases in ancillaries,” Surry said. “So the cost of airfare doesn’t wholly reflect what people are paying.”
In fact, Hobica said that airlines might raise ancillary fees in lieu of airfare hikes.
“The checked bag fee, it’s been $25 for many years,” he said. “Will that go up to $30?”