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The Kerosene Connection: As fuel prices fall, will your ticket price?

AuthorAda Kozłowska

The price of jet kerosene is tracking to decline for the first time since 2008. Passengers are buying tickets at a record pace as flights consistently sell out. Yet US carriers say they won’t offer lower fares, as they have no incentive to do so.

“Just like gasoline prices drop for the consumer, why not airline prices?” said Hank Levenson, who was flying this month to Orlando, Florida, from Dallas for his law-enforcement training business. “Coming from the same refinery, the same source, why not pass it on to the consumer? That’s what good customer service is all about.”

Crude oil’s worldwide slide in 2014 has cut jet fuel by 22 percent, a boost for U.S. carriers because it’s their largest cost. At the same time, one-way domestic coach flights averaged $466 this year through September, 1.7 percent more than for all of 2013, according to data compiled by Bloomberg Intelligence.

Airline executives admit that they have the pricing power and have no intention to give it up. It’s basic math, spending less and charging more benefits both earnings and share prices. The six largest U.S. carriers posted more than $3.96 billion in third-quarter profits. “In a strong demand environment, we don’t plan to go off and just proactively cut fares,” American Airlines Group Inc. (AAL) President Scott Kirby said on an Oct. 23 conference call.

The airline industry hasn’t found itself in this sort of sweet spot in years. The global financial crisis had reduced industry operations at a rate unseen since WWII. So naturally they are delighted to enjoy the savings of reduced fuel costs with increased or steadying ticket fares. The price of jet fuel has been dropping since hitting a 2014 high of $3.20 a gallon in February. The price was at $2.46 a gallon at the end of October.

Airlines in the U.S. filled more than 83 percent of their seats this year through July, ahead of last year’s stats according to the US Bureau of Transportation Statistics. And yet airlines are increasing fares, with Delta leading the industry increasing fares 5 times after 20 attempts in 2014. Last year carriers managed to raise rates only 3 times out of 12 tries.

All of this makes us wonder about that “fuel surcharge” that passengers continue to pay, albeit on international flights only. The airlines are finally in a position of pricing power and that has helped them increase profits after years of losses to the tune of $60 billion or so. Hopefully a financially healthy airline industry will result in a better experience for the consumer, if not lower prices.

 

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