Airlines Enjoy Lower Oil Prices; Higher Profits Ahead?

Airline Ticket PricesOver the past year, oil prices have dropped by more than 50%. Not surprisingly, jet fuel, an airline’s largest expense, has dropped in step with oil prices. Ticket prices, on the other hand, remain sky-high.

In North America, jet fuel prices have fallen nearly 36% from a year ago. Technically, plunging oil prices should bring a substantial discount to air travelers, but ticket prices have not dropped as one would expect. (Source: IATA, last accessed, May 19, 2015.)

Weak Oil Prices a Boom for an Oligopoly Airline Industry

Airline mergers over the last number of years have left U.S. travelers with few airline options: Delta, United, Southwest, and American US Airways. It is worth noting that these airlines purposely don’t compete on the same routes. An air travel oligopoly is an industry with very little competition, composed of a few big players.

The major airlines say their industry is as competitive as ever. One of the reasons that ticket prices have not dropped is high demand with low seating capacity. There is a seeming disconnect here. When oil prices go up, airlines raise their ticket prices in the blink of an eye. But they seem really hesitant to adjust their prices to match the massive decline in oil prices.

Airline Industry Outlook for 2015

Falling oil energy price is a good thing for airlines. In addition, some airlines even extend their profit by using hedging strategies to lower their cost. According to the International Air Transport Association, the U.S. airline industry is set to post “net post-tax profits” of $13.2 billion in 2015—that’s up roughly 11% from $11.9 billion in 2014. The forecast was based on an average of $85.00 per barrel for crude oil where today oil prices are near $59.00 per barrel. (Source: IATA, December 10, 2014.)

In a recent article, I suggested crude oil prices will rest at the current level for some time. (See “Crude Oil: Basic Fundamentals Suggest Flat Prices Ahead.”)

Despite relatively low oil prices, the airline industry is reluctant to reduce ticket prices and pass savings onto their overextended customers. Why, the airlines say, should they? After all, the demand is there.

Thanks to low oil prices and high ticket prices, the airline industry should enjoy a profitable year.