Cheap fuel doesn’t mean cheap fares as airlines hold savings

Passenger aircraft operated by KLM, the Dutch arm of Air France-KLM Group, Delta and United Airlines sit on the tarmac at Schiphol Airport, operated by the Schiphol Group, in Amsterdam, Netherlands, on Jan. 19. Air travelers have benefited somewhat from the lowest jet-fuel costs in more than 12 years, but not nearly as much as the airlines. credit: Bloomberg photo by Jasper Juinen.

Rob Britton, who spent two decades with American Airlines Group, is unapologetic in defending the profits his former employer and other U.S. carriers are making. Sure, fuel’s cheap, but what company cuts prices as soon as its costs shrink?

“Amtrak doesn’t lower its prices because diesel is cheaper, and New York taxi cabs don’t lower their prices because a tank of gas is cheaper,” said Britton, now an aviation consultant in Washington.

Consumers have benefited somewhat from the lowest jet-fuel costs in more than 12 years, but not nearly as much as the companies. While travelers are paying less on average for trips, base fares — the prices assigned to each seat — have remained essentially unchanged since 2014, according to Rick Seaney, chief executive officer of ticket-research company

Meanwhile, spot jet-fuel prices in New York harbor have tumbled 70 percent since the start of 2014, to 92 cents a gallon Tuesday. Prices hit 81 cents on Jan. 20, the lowest since December 2003, according to data compiled by Bloomberg.

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One reason why base fares haven’t fallen more: Collapsing oil prices haven’t triggered a major economic slowdown, which typically would quash demand. Airlines also are taking advantage of the lower costs to pay dividends, repurchase shares, reduce or refinance debt and add capacity.

The industry reported combined losses of $58 billion in the nine years ended in 2009, so “we’re going to do our best to make money in these good years, because who knows what’s going to happen,” said Britton, who served as a managing director and adviser to the chairman at American.

Delta Air Lines, United Continental Holdings and Southwest Airlines all reported record adjusted profits in 2015 and paid a combined $7.6 billion less for fuel — which historically accounts for about one-third of industry operating costs. The companies said they would have saved more if not for contracts that locked in some prices in advance at above-market rates. American, the world’s biggest carrier, will report its full-year results Jan. 29.

United, Delta and Southwest expect to spend about $6.4 billion less combined on jet kerosene this year, and Hunter Keay, an analyst at Wolfe Research in New York, predicts more of these savings will flow through to travelers.

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“I anticipate that airlines will keep only 31 percent of lower fuel prices in 2016,” down from 50 percent last year, he said. “The rest of it will be passed on to consumers in lower ticket prices or to pilot unions” seeking higher pay in contract talks. Labor costs vie with fuel as the industry’s biggest single expense.

Competition from ultra discounters such as Spirit Airlines Inc. have helped push fares down in the past few years. The average amount paid for a domestic ticket at the end of December was $388, the lowest since January 2010, according to data from Airline Reporting Corp., which settles sales between airlines and travel agencies. The average premium ticket was $741, lowest since December 2008.

The largest carriers’ oil savings have allowed them to match discounters’ cheapest rates, triggering fare wars in some markets. On Tuesday, American posted on its website a $106.20 Dallas-Fort Worth/Miami round trip for next month, while United offered a $276.20 price for Newark, New Jersey/San Francisco.

The most-discounted leisure tickets were down 27 percent as of Dec. 28 from a year earlier, according to Bob Harrell, founder of Harrell Associates, which tracks one-way pricing on 300 routes. Refundable business tickets rose 3 percent.

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Consumers saw $6.3 billion in cheaper fares in 2015 and may see another $6.1 billion in savings this year, Keay said. Fares should fall by the mid-to-high single digits in the next four months before stabilizing, he added.

Some savings may be offset as carriers continue to add separate charges for items such as checked bags, food and seat upgrades, according to a recent report from the Global Business Travel Association in Alexandria, Virginia. These ancillary fees, which apply to all passengers who select services or products beyond a base fare, may have hit $7 billion industrywide in 2015, up from $6.5 billion in 2014, said Michael McCormick, the association’s executive director.

Some passengers say they haven’t noticed a change in prices.

“The planes are always packed, and I don’t see air fares dropping,” said Kevin Pratt, an advanced analytics consultant who flies about twice a week. “I mostly fly Southwest, which has better deals on almost every route, although the prices on Southwest have generally risen, too.”

The average domestic fare should fall less than 1 percent in 2016 after declining 5.6 percent in 2015 from the previous year, based on the business-travel association’s report. Economy travel within North America should average about 5 percent less this year, similar to the decline through the first 10 months of 2015, according to an Expedia Inc. analysis of Airline Reporting data.

Industry executives decline to discuss ticket prices. American, Delta, United and Southwest have agreed to cooperate with a U.S. Justice Department antitrust review, begun in July, of whether airlines discussed the supply of seats to gain pricing power.

A increase in oil prices and higher labor costs may be the biggest threats to lower fares. United pilots approved on Jan. 22 a two-year contract extension with raises over three years of 13 percent, 3 percent and 2 percent. Delta and its pilots are negotiating a new agreement. Southwest is in talks with unions for flight attendants and mechanics and is preparing for a new round of discussions with pilots.

The biggest U.S. airlines raised round-trip domestic fares $6 earlier this month, the first widespread increase since June 2015, according to Jamie Baker, an airline analyst at JPMorgan Chase & Co. Carriers have had just a 21 percent success rate in boosting fares since 2013, he noted. Attempts generally fail when airlines such as Southwest refuse to match the increase, forcing rivals to roll back prices to remain competitive.

“It’s a national pastime to complain about the level of air fares,” Harrell said. “But if you’re a careful shopper and have flexibility in your schedule, you can find good fares. The lowest leisure fares are still dramatically below where they were a year ago.”