The Story Behind the Recent Rise in Airline Ticket Prices
Posted April 28, 2021
We’ve written quite a bit recently about how the economic recovery so far has spurred increased demand for oil and refined products (see here, here, and here). The demand for air travel and consequently jet fuel, which historically have related strongly to the pace of economic growth, lagged the economy so far.
In fact, U.S. passenger traffic in April 2021 was roughly half of what it was in 2019, per the Transportation Safety Administration, so many people are asking why ticket prices have already begun to rise. After all, even as summer approaches, aren’t there a lot of idle planes and crews eager to be re-hired and return to service?
There is in fact a lot of idle capacity. Yet, ticket prices also seem to have increased recently and outpaced the return of passengers – for example, with recent price spikes for airfare to some attractive destinations.
Although some have blamed recent fare increases on the prices of crude oil and jet fuel, which logically could be a contributing factor, the fact is that jet fuel prices have remained historically low due to the 2020 COVID-pandemic and recession.
Details follow, but the root causes appear to be that – even though increased freight-by-air helped airlines survive – passenger air demand has yet to rebound to the point where planes are sufficiently full as to cause airlines to add new flights and routes. So, the fundamentals of supply and demand suggest that travelers are competing to buy summer seats on a still-limited number of flights that are in service.
The current context for air travel may surprise many people. How is it that, despite having about half the number of passengers, the numbers of U.S. flights rebounded in April 2021 to its pre-COVID-19 levels, per FlightRadar24?
Flight traffic has recovered faster and more than passenger traffic because large volumes of cargo have been going by air. Globally, air cargo was up 9% in February 2021, compared with February 2020, according to the International Association of Air Travel (IATA), due to economic recovery spurring manufacturing new orders and exports at the same time as inventories were low in relation to sales volumes. Historically, this has implied that that businesses had to replenish their inventories, and air cargo has been a fast and cost-effective way to do that, per the IATA.
An additional consideration now is the need to airlift COVID-19 vaccines across the world, which has motivated airline industry officials to warn the air cargo system is currently suffering from severe capacity shortages and not equipped to move massive quantities of temperature-sensitive cargo.
So much for there being a complete lull in airline activity due to the pandemic!
Another factor that generally could affect ticket prices is an airline’s cost for jet fuel, which Frieghtwaves recently highlighted as being pivotal to making suitable economics for passenger flights, especially where planes are not very full and there is no cargo on board to help make the flight profitable.
Although this sounds plausible in a very recent sense, consider price trends over the past several years. Jet fuel prices have historically moved along with those of crude oil, the main input to refine it.
The historical premium of jet fuel prices above its input crude oil cost has fallen and remained low. Specifically, U.S. Gulf Coast jet fuel prices averaged about one-third above those of WTI crude oil between 2017 and 2019, which compensated for costs to manufacture, transport, market and distribute the fuel. In 2020, jet fuel prices fell in September to as little as 7% above that of crude oil and averaged 19% over WTI crude oil for the year as a whole – and was expected by futures markets to average 14% over WTI crude oil through 2021. Therefore, for any given crude oil price, jet fuel was relatively less expensive in 2020 and expected by futures market to remain so through the rest of this year.
Next, consider that recent jet fuel prices have been below those for three of the past four years on average. Jet fuel prices averaged $1.56 per gallon in 2017, $2.01 per gallon in 2018, and $1.88 per gallon in 2019 and also in 2020. By comparison, the highest month of jet fuel so far in 2021 was $1.66 per gallon in March. Consequently, even though jet fuel prices have rebounded from the extraordinarily low levels in mid-2020, they have remained historically low.
Additionally, futures and options markets, which provide airlines with an ability to secure their prices going forward, have remained relatively low and steady. Some airlines have taken advantage of these financial instruments and enjoyed price stability.
Together these things – that is, historically low margins and price prices plus the ability to lock in those low prices – suggest that it would be hard to blame jet fuel prices for higher ticket prices.
The way airlines set ticket prices is one of the most complex of any industry, since passengers can and do typically pay different prices from one another based on their point-to-point origin and destination, when and how they booked the flight, class of travel and quality preferences (economy, business or first class – or anything in between), and whether they want options to alter or refund the ticket.
While this complex airfare pricing generally is keen at eliciting what passengers are willing and able to pay, airlines are also motivated to sell more seats. Airlines have fixed costs for their aircraft, gates and employees. Competition in the industry also remains fierce.
Consequently, as peak summer air travel demand approaches, travelers are booking a limited number of scheduled flights, but it also requires positive economic price signals for airlines to expand their flight offerings.
In summary, economic supply/demand fundamentals appear to be the driving force behind recent airline ticket prices.
And after more than a year of the COVID-19 pandemic, here’s hoping with vaccine progress that we can collectively resume normal travel routines and gather with family this summer.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.
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