Why Airline Consumers Did Not Profit from Falling Oil Prices

Why Airline Consumers Did Not Profit from Falling Oil Prices

Who is the bigger gainer from falling fuel prices – passengers or airline companies? National carriers have reported a big jump in profits for the year 2015, and the biggest reason for it was the drop in oil prices. However, gains appear not to have passed on to consumers. In order words, the sinking oil price has not made airlines make big cuts in airfares.

Appeasement Mode

For example, Delta Air Lines, Inc. (NYSE:DAL) CEO, Richard Anderson said that results for the last year were a record on all fronts. Delta’s profit jumped to $4.5 billion in 2015 from $659 million in the preceding year. Instead of passing on the benefit of weak oil prices, airline firms appear to be in appeasement mode as some carriers have brought back free snacks to economy fliers. Some carriers have resorted to buying newer planes as well as renovating terminals.

Oil prices dropped over 30% last year whereas demand for air travel boosted only 9%. However, there was no change in domestic airfares in the last year. According to online ticket price trackers, the cheapest domestic airfare witnessed a 1.5% increase last year. The Transportation Department is yet to calculate the airfares for the full year. However, the average fare for the first half was $388, which was 1% lower than the prior year period.

Demand Dictates Pricing

Airlines Weekly Managing Partner, Seth Kaplan, said that as long as the demand for air travel was strong, airline firms were not going to slash prices. He said that these firms were not doing any charity and that airlines were not ready to provide consumers the gains of falling oil prices just for the sake of doing it.

There is a reason for domestic airliners not passing the cost benefits of low oil prices. The past decade witnessed a series of mergers in the domestic airline sector. According to a Portland University finance professor, Richard Gritta, 70% of domestic traffic was controlled by four airline companies, Southwest Airlines Co (NYSE:LUV) American Airlines Group Inc (NASDAQ:AAL), United Continental Holdings Inc (NYSE:UAL), and Delta Air Lines, Inc. (NYSE:DAL). The same four firms were controlling 50% of air traffic a decade ago.