It comes as no surprise that air fares are rising again.  They rise every time oil rises in price.  They generally rise out of proportion to the cost of oil and there is a reason for that, too.  

One reason air fares are rising a bit more rapidly this time compared to 3 years ago despite oil prices being somewhat less still is that refiners are actually charging more for the refined fuel than they did a few years ago.  Believe it or not, airlines don’t have quite the pricing power people think they have when it comes to the pump price of their fuel.  It’s my observation that the only one who makes money when oil prices are volatile are the oil companies who sell refined products such as fuel. 

Airlines actually did a pretty good job of spotting their dilemma and bidding the air fares upwards rapidly.  As someone formally educated in economics, it fascinates me to watch air fare volatility due to sudden rises in costs.  Unlike many other “free market” areas in the world, the air fare world operates with more “freedom” and more “anti-competitive” moves than you get to see in most industries. 

It works like an auction.  One airline generally “bids up” airfares with an increase and waits to see if other airlines match them.  Airlines can’t cooperate on prices but they can signal each other.  A fare increase is a question that reads like “Can we all raise prices and get along?”  The response is whether or not other airlines raise prices as well.  Another airlines or a few airlines may well raise their prices, too and generally after a few days, usually not more than a week, we know if they’ll stay there.  Sometimes several airlines raise prices but the price increase fails because one airline doesn’t agree. 

Generally speaking, it’s the major and nationwide airlines that get to set prices that way.  It’s the smaller, low cost airlines that can defeat those prices on specific routes but it is rare for those smaller, low cost airlines to set a price increase nationally. 

Southwest Airlines has often been the spoiler in fare increases.  SWA is a lot more “national” than most realize and it manages its costs a bit better than most, too.  In addition, that airline is willing to work from slimmer margins than most.  But in this most recent season of rising air fares, SWA hasn’t played the spoiler very often.  It has a few times but SWA has actually become a leading indicator as to air fares by agreeing to those rising prices far more often than it historically has.

Over the past 3 months, airlines have agreed to these increases far more than is usual.  Why?  Consolidation.  There are three SuperLegacy airlines left and one “national” LCC carrier and one legacy remain as well.  There are no upstarts remaining that can push air fares down and those who are setting prices all have costs that are closer to each other than has been the case in a long time. 

Good for the airline industry?  No, not really.  There is less competition and the competition that remains actually has a reduced incentive find savings elsewhere.  Good for the consumer?  No, not really.  Higher air fares lead to people reducing their travel which has other implications for the travel industry.

Filed under: Airline News by ajax