Airfares are really taking off in the wake of the Middle East turmoil that has sent oil prices soaring, and with the summer travel season on the horizon, airline industry experts fear the sky’s the limit.
Fuel costs represent at least a quarter of airline expenses. Every dollar increase in a barrel of oil costs the airlines $400 million, Jean Medina, spokesperson for the Air Transport Association, told MillionaireCorner.com. Jet fuel is at over $3 a gallon. If it stays at that price, the airlines’ fuel bill will increase by $15 billion. “It’s a pretty significant increase,” Medina said. “The entire bill for all of 2010 was about $39 billion.”
According to research compiled by American Express, and reported by Daily Finance, the average airfare paid in January—before the current Middle East unrest was 8% higher compared to January of last year. First-class fares were up 2% and full-coach fares climbed 4%. Typical business fares -- such as a midweek ticket -- fell 3%.
Since Jan. 1, the nation’s largest airlines have instituted seven fare increases, USA Today reported. Last week, American Airlines announced it had bumped its domestic fares by $10 per round. It also raised round-trip fares to Canada and Hawaii by $20.
Airlines are practicing capacity discipline to contain costs, Medina said. For example, an airline may schedule five hourly flights a day from New York to Chicago instead of six. With fewer seats available, airlines can charge more as travel demand increases.
“Airlines are continuing to evaluate how best to respond to price volatility, both with respect to offsetting increases and also boosting revenues,” Medina said. Among their initiatives is taxiing toward the runway with one engine running and cutting off the engine immediately when arriving at the gate. There is also “a major move” toward retiring less fuel-efficient aircraft, she said.
The rise in airfares, though, is not just a question of oil prices. With the economy on the rebound, demand for air travel is high. There is a rise in corporate travel, while leisure travelers are planning spring break excursions and summer vacations. Matthew Jacob, senior airline analyst at ITG Investment Research, told USA Today says that airlines have always been aggressive in charging as much as they could for seats on planes. "This is a business that has always had very dynamic pricing,” he said. “You can book a flight now and pay a different price than someone who booked it yesterday and more than someone who books it tomorrow."