Reduced Fuel Prices Aren't Bringing Down Airfare Prices

Posted on October 21, 2008 by LCT Staff - Also by this author - About the author

DETROIT — The financial hit at the gas pump is a lot less painful since oil prices dropped dramatically — but don't expect airfares to follow the same heading.

For most of this year, airlines have blamed soaring fuel costs for hikes in ticket prices. But as fuel bills dropped, a worsening economy may have grounded many travelers. The airline industry traded a fuel crisis for a financial crisis.

"They've got to make a buck, and they haven't made a buck for so long," said Terry Trippler, an airline analyst based in Minneapolis. "I just don't anticipate seeing airfares drop substantially in reaction to lower fuel costs."

As of Oct. 10, the average per-gallon jet fuel cost for U.S. carriers was $2.56. The average price for most of 2008 was $3.38.

"You don't recover from multibillion-dollar increases in your fuel bill in the matter of a few weeks," said David Castelveter, spokesman for the Air Transport Association. "The carriers are still on track to lose $5 billion this year."

Castelveter adds that airfare increases have stayed low, despite the 274% increase in jet fuel prices since 2000. During that period, he said, airfares have increased just 1.3%.

"We waited a while to react to the increases in jet fuel. ... We haven't been able to make that up," said Michelle Aguayo Shannon, a spokeswoman for Northwest Airlines. "But you have to really look at the airfares; there's a false sense that fares are through the roof."

Pockets of cheap deals are available, especially in markets with a low-cost airline such as Southwest competing on a high-volume route, said Rick Seaney, chief executive officer of farecompare.com.

But overall, domestic U.S. airfares went up this year from 2007's prices — rising 20% between bigger cities, 30% between midsize cities and 40% between small cities, Seaney said.

Seaney said the airlines are in survival mode and will continue to cut flights, slashing about 200,000 seats a day, beginning in mid-December.

Cutting flights already has made a difference in the airlines' bottom lines, cushioning losses that could have been much worse, said Darin Lee, an airline analyst for LECG, a global consulting firm based in Cambridge, Mass.

"The good news is fuel is going down, but the bad news is the demand for oil is down because of a bad economy," Lee said. "We're jumping up and down because oil is about $70 a barrel, but it is five to six times higher than it was in 1998."

Crude oil for November delivery rose $4.37, or 6.3%, to $74.22 a barrel, a drop of more than 50% since reaching a record $147.27 in July.

Lee has an airline ticket fuel-cost calculator at his website, www.darinlee.net/fuel/fuel_widget.html, where a program shows how much of a ticket's price pays for fuel. At the height of the jet fuel prices, that figure reached almost 80% for some flights.

Summer fuel costs were blamed for third-quarter losses at Continental Airlines and Southwest Airlines, which reported its first quarterly loss in 17 years on Thursday.

Those airlines' announcements followed Delta Air Lines Inc.'s report of losing money during the busiest travel season of the year, and American Airlines parent AMR saying it would have too without the sale of an investment business.

Earnings for Northwest Airlines, Detroit Metro Airport's largest carrier, are expected to be announced Wednesday. However, Northwest officials have predicted a profit, driven partly by the airlines' new checked bag fees. "The airlines have lost billions and billions of dollars. They are not in the mood to do anything with fares," said Tom Parsons, chief executive officer of bestfares.com.

But Parsons advises that a smart shopper can find deals. He suggests going to Europe over the holidays, as fuel surcharges on international flights have declined.

The U.S. dollar is doing better against the pound and the euro, which makes Europe much more affordable, he said.

More advice: Learn to pack light because those checked bag fees aren't going to go away, said Carl Schwartz, chief travel officer for cheapflights.com.

"Once the fees are out there, it's difficult to pull back. They will lower airfares before they take those away," Schwartz said, adding that he's not opposed to the a la carte pricing popular among airlines.

"I don't need to buy their $2 soda. ... I learned to pack light. That's optional stuff. ... I had to change my travel habits," he said.

"People feel like the airlines are being dishonest. But really, they are trying to survive."

Sources: Detroit Free Press/USA Today

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