Will airlines keep fares high despite cheaper fuel?

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Airlines Likely to Maintain High Fares Despite Fuel Price Drop

Airlines are poised to benefit from billions of dollars in savings on jet fuel due to a recent decrease in oil prices, but passengers are unlikely to see immediate fare reductions. This is because a constrained capacity environment may enable carriers to sustain ticket prices significantly above pre-conflict levels. In the US market, a clear illustration of this trend is evident, where fare increases have not kept pace with the year's surge in fuel costs, while domestic seat growth remains limited. This situation provides airlines with the flexibility to utilise reduced fuel expenses to improve their profit margins rather than to lower recent price hikes.
Fares Lag Behind Fuel Cost Increases

US jet fuel spot prices experienced a substantial decrease, falling to US$2.85 per gallon on June 17 from a high of US$4.88 in early April. If this trend persists, it could reduce the US airline industry's annual fuel expenditure by over US$40 billion, based on industry fuel consumption data. Despite the escalating cost of jet fuel, US airlines implemented measures such as raising ticket prices, increasing baggage fees, and reducing flight schedules. However, these actions have only partially compensated for the rise in fuel expenses. Industry data indicates that from January to May, jet fuel prices escalated more than three times faster than airfares in the US. Deutsche Bank estimates that US carriers will only recoup approximately 60 cents for every additional dollar spent on fuel, representing US$14.4 billion in increased revenue against US$24.1 billion in higher fuel costs. Some airlines are recovering a smaller portion of these increases; Alaska Air reported recovering about one-third, while Delta, United, and American Airlines anticipate recovering 40-50% in the second quarter. United Airlines CEO Scott Kirby has expressed a goal of recovering 100% of the fuel cost spike through pricing adjustments by the end of the year.
Uneven Fare Relief Expected Globally

Outside the United States, the extent of fare relief is anticipated to vary significantly. Lower crude oil prices will require time to translate into reduced jet fuel costs. Unless jet fuel prices revert to early-year levels, airlines are likely to maintain current fares or even increase them where demand permits. In Europe, a divergence in fare trends is probable. Long-haul fares are more likely to ease, as airlines were more successful in passing on higher fuel costs for these routes. Conversely, short-haul fares in Europe might remain firm, particularly if the recent peace agreement stimulates bookings and demand. In Asia, China's major airlines are facing weak pricing power, whereas Cathay Pacific is in a stronger position due to higher existing fares, robust cargo revenue, and sustained premium demand, which can help offset fuel costs. The Middle East presents a distinct scenario, with some airlines potentially resorting to promotional offers to reclaim traffic, although high fuel costs generally preclude widespread discounting.
Impact on Airline Earnings

The degree to which airlines benefit from lower fuel prices will be contingent on the duration of these lower prices. Fuel expenses are typically based on purchases made over time, not on immediate spot prices. Even with recent declines, jet fuel remains 54% more expensive than it was a year ago, according to the International Air Transport Association. Southwest Airlines' Chief Operating Officer, Andrew Watterson, highlighted the ongoing pressure, stating that fuel prices need to decrease for the airline to return to pre-pandemic profit margins. For many carriers, this situation leaves little incentive to reduce fares, as they focus on rebuilding earnings. Analysts at Jefferies estimate that a 5% reduction in projected fuel costs could significantly enhance the earnings per share for major US airlines, with potential increases ranging from 10-15% for Delta, Southwest, and United, and up to 50% for American Airlines.
Limited Risk of a Domestic Fare War

Historically, falling oil prices have often led to increased airline capacity and subsequent fare wars in the US market. However, current conditions do not broadly support such a scenario. Factors such as delays in aircraft deliveries, limited airport capacity, and the weakened position of some low-cost carriers are collectively reducing the likelihood of a widespread domestic fare war. Projections indicate that US domestic airline seat capacity is set to grow by only 0.4% year-on-year in the third quarter, a significant decrease from the 4.6% growth anticipated before the recent escalation of Middle East tensions. This constrained capacity growth, coupled with fewer aircraft entering service and cutbacks by budget carriers, limits the potential for substantial capacity increases, thereby enabling airlines to maintain their current pricing strategies. Consequently, for passengers, any potential fare relief may depend more on the sustained strength of consumer demand rather than solely on reductions in fuel costs.

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Will airlines keep fares high despite cheaper fuel?

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