March 9, 2016

Travel News: Why Airline Ticket Prices Aren’t Reflecting Fuel Prices

A few weeks ago, I delivered an overview of the airline revenue management function to a group of coworkers. To kick off the presentation, I decided to correct some common misconceptions by including this quiz:

Which of the following goods/services has had their prices increase relative over the last fifteen years, relative to the consumer price index?
a) Gasoline
b) NFL tickets
c) Single-family homes
d) Cars
e) Air travel

The surprising answer is: all of the above, except air travel! Here’s some data to back up that seemingly unbelievable claim:

I’ve highlighted the price of jet fuel, disposable personal income per capita, the US Consumer Price Index, and the price of air travel. Surprised to see how that ranking goes?

This data comes from 2014 – after which point fuel prices fell while airline ticket prices remained steady… so I understand why there’s been a bit of an uproar from the American public. If fuel prices are falling, then why aren’t ticket prices? But I think the above data provides the exact background story of why. Until 2014, the price of air travel had decreased significantly relative to the price of fuel. So while everyone is complaining about how fuel prices are dropping and yet ticket prices aren’t, that’s because the increases in fuel prices were dramatically outpacing increases in ticket costs – so the drops are just allowing a bit of a catch up in margin. (Note that no airlines in the US have gone bankrupt since 2014, despite that being an all-too-common occurrence from 2000-2010.)

I know we’ve all heard about the fuel hedging that allows airlines to pay a cheaper price for fuel than what you pay at the pump. But don’t forget that when you hedge you have to take the good with the bad – so for some airlines, they actually aren’t seeing the benefits of lower fuel costs just yet.

But don’t take my word for it – last month, the US Department of Transportation released quarterly numbers revealing that the average price for an airline ticket in Q3 2015 was the absolute lowest it’s been in six years. Check out this great coverage from the Skift that tells the full story.

Is the airline industry perfect? No, but I can’t think of an industry that is. The infrastructure behind airlines is expensive (which is why you don’t own a jetliner or an airport), and air travel isn’t a god-given right. Instead, I prefer to look at the airline industry as nothing short of miraculous, allowing us to travel the world and see people and places our ancestors couldn’t have imagined. I love being a part of it!


6 thoughts on “Travel News: Why Airline Ticket Prices Aren’t Reflecting Fuel Prices”

  1. That’s a good way to look at it…even though we are all grumbling! Thanks for putting the positive spin on a sore spot for those of us trying to scramble for reasonable flights right now. After all, four or five hours to our destination may just beat 13 hours in the car! 🙂

  2. I work in oil and gas, so semi-tied to what you’re talking about.
    While fuel prices may have dropped, for companies that are both extracting AND refining, the sale of the end product is the only way they’re able to make any kind of money since they’re losing money on extraction and transportation, which is also why the decline in fuel prices isn’t in-line with the decline in crude prices.
    (I could talk about this all day long. It’s an interesting industry, but really, really scary right now. My province has laid off roughly 100,000 workers since the beginning of 2015).

    1. That’s really interesting! I don’t know too much about the fuel prices, since I tend to focus more on the revenue side, so good to know that I didn’t get the facts wrong there 🙂

  3. Really liked this post! The balanced thinking is awesome! Particularly this quote: “Is the airline industry perfect? No, but I can’t think of an industry that is.”

    Perhaps everyone *should* own a jetliner and manage airports/runways to understand the balance between short term and long term interests? Or maybe not. Or maybe we already do, in that we have our own “jetliners” (life, goals) in which we must balance well in order to be successful.

    I love your understanding of ‘miraculous’. Most things of life requires a collaboration of infinite people to get done, which 99% of the people involved never get to meet each other. How is that possible? How could one person or even a small group of people even hope to plan something as incredible as the diversity of grocery market selections or multi-hub routing schedules?

    Loved the post. – nice writing!

    1. You make a fair point – there are so many things that we’ve been able to get done only through the economies of scale that come with outsourcing and common currency, compared to our cavemen ancestors who had to do everything themselves. But as someone who works in the airline industry, I know that it’s a lot easier said than done to “make seats bigger!”, “always keep flights on time”, and “make ticket prices cheaper.” I think the airline industry is really unfairly maligned because for some reason people see it as a public service / right, compared to a lot of other industries that are equally (or really, much more) profit-making.

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