Fuel Prices drive fares?

It is being said more and more that rising fuel prices are forcing a rise in air fares and that message is being driven by the airlines.  While there is some truth that increasing instability in oil prices is raising the cost of fuel, that isn’t the whole story. 

Oil prices have been unstable for nearly 10 years considering the trend of rising oil prices since 2001.  those rises have been impacting airlines over and over again.  In fact, they are even somewhat predictable and that is why fuel hedging by airlines has yielded generally good results.  If anything, airlines take a hit in quarterly reports when fuel prices go down because that means their hedge *costs* them money. 

Airlines aren’t being greedy.  A $27 Billion company such as Delta *should* be earning a profit even in tulmutuous times.  In fact, airlines are doing what they should have been doing the last 30 years:  controlling capacity and even working together (legally) in the market places to support sustainable air fares that yield a profit.  That’s being done in two ways.

First, airlines are constraining growth of their companies and their capacity on certain routes.  This may become problematic for many as there are routes that would benefit from a better sized aircraft that are now either being served with too many frequencies by 50 seat jets or not served enough with right sized jets.  Airlines need a 100 to 130 seat airliner that they can operate via either regional airlines or themselves that will permit a cost structure that yields a profit.  Supposedly, the CSeries does this.  In practice, I do not know if we have that airliner . . . yet.

Second, airlines are “signaling” their competitors with air fare increases.  Airline A raises prices (often somewhat tentatively) and Airlines B through Z either stand pat, meet the increase or even decrease their prices.  It works like an auction for a good that can spoil.   Right now, the US airline marketplace has no upstarts that want to pick fights with the larger airlines.  The larger airlines know it is in their best interests to agree to those prices increases unless they absolutely are going to either lose marketshare or suffer unfilled aircraft. 

For the past 4 years, a great deal of discipline on the part of airlines has been shown in both raising air fares as well as manaing excess capacity and it shows in the reports of profits by airlines who are still in the midst of a severe economic whirlwind.

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