What limits airlines from passing fuel savings to passengers?

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Airlines May Retain Fuel Savings Due to Tight Capacity and Limited Seat Growth

Airlines are unlikely to immediately pass on significant savings from falling jet fuel prices to passengers. This is primarily because of tight capacity constraints and limited growth in domestic airline seats, which allow carriers to maintain current fare levels and rebuild profit margins rather than reducing prices. While US jet fuel spot prices have fallen sharply from early April highs, airlines have only partially offset rising fuel costs through measures like ticket price increases and bag fees.
Fares Still Lag Fuel Costs

From January to May, jet fuel prices increased more than three times faster than airfares in the US market. While airlines implemented fare hikes and reduced schedules, these actions only partially compensated for the surge in fuel expenses. For instance, Deutsche Bank estimated that US carriers would only recover about 60 cents for every additional dollar spent on fuel. Average domestic fares booked one week before travel had risen by 34.1% from the previous year as of June 8.
Uneven Global Fare Relief

The extent to which passengers outside the US will benefit from lower fuel prices is expected to be varied. It typically takes time for reduced crude oil prices to affect jet fuel costs, and demand levels play a significant role. In Europe, long-haul fares are more likely to decrease as airlines had more success passing on higher fuel costs on these routes. Conversely, short-haul fares might remain firm, especially if bookings and demand strengthen. In Asia, major Chinese airlines face weak pricing power, while Cathay Pacific is in a better position due to higher fares and premium demand.
Earnings Rebuilding and Limited Fare Wars

The actual financial benefit airlines receive from lower fuel prices depends on the duration of the price decline, as fuel expenses reflect purchases made over time rather than spot prices. Even with recent decreases, jet fuel remains 54% more expensive than a year ago. This situation provides airlines with an incentive to use cost savings to rebuild earnings rather than immediately lowering fares. Unlike previous periods of falling oil prices, current market conditions, including aircraft delivery delays and tight airport capacity, are limiting the risk of a widespread domestic fare war in the US. US domestic airline seats are projected to grow minimally in the third quarter, further reducing the likelihood of significant capacity increases that could drive down prices.

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What limits airlines from passing fuel savings to passengers?

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