Recently, fuel prices have dropped, but there seems to be disagreement about how this affects airlines. Fuel prices are often hedged, which means airline companies try to protect their losses by buying fuel at set prices months in advance. The benefit is that if fuel prices rise, they are locked into lower prices. The drawback is that if prices drop, the airlines will lose out on potential savings. With continually dropping fuel prices, travelers are wondering why fares aren’t dropping as well.
It’s rare for a company to lower prices, even if they’re seeing improvements to their bottom line. Instead, companies look for ways to make upgrades that are often long overdue. Many airlines are now able to invest in new planes or remodel existing terminals. Some are even adding more flights. As long as seats are in demand, there’s no reason for the airlines to drop fares. Just last year, air travel demand increased by 9 percent.
In addition to airlines buying newer planes and tackling aging terminals, some are also dealing with higher labor costs. For example, United has to pay their pilots more for the next three years from a contract extension deal. This extension will cost the company an additional 13 percent in pilot wages the first year, 3 percent the second year, and then 2 percent for the following year.
As with any business, airlines that don’t take increased profits for granted will fare the best. Should prices on fuel dramatically increase, having more flights and newer planes could be more of a burden than a benefit. With crude oil prices dropping over the past four years, and dramatic drops in the last year, it’s only natural to think prices will rise again at some point.