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Oil prices drop, but not airfares

Oil prices recently dropped to five-year lows, and consumers are reaping the benefits when they fill up at the gas pump.

Planes at Philadelphia International Airport. (Michael S. Wirtz / Staff Photographer)
Planes at Philadelphia International Airport. (Michael S. Wirtz / Staff Photographer)Read moreMichael S. Wirtz

Oil prices recently dropped to five-year lows, and consumers are reaping the benefits when they fill up at the gas pump.

But they are not seeing the same good deals on airfares, which are at the same levels as when crude was above $100 a barrel.

Airlines are not passing on their fuel savings to customers for several reasons.

First, demand for air travel remains strong, and planes are full. With an improving economy, people have more disposable income.

"What's the incentive to lower fares?" asked airline analyst Bob McAdoo, of Imperial Capital L.L.C. in Los Angeles. "If I am running a business, and my obligation is first to my shareholders and my employees, what is the incentive for me to reduce the fares?"

After the Sept. 11, 2001, terrorist attacks and a decade of losses and bankruptcies, airlines cut capacity, seats, and flights. The industry is now profitable after a series of mergers, the latest between American Airlines and US Airways last year.

"When there were more competitors, all trying to outdo the other, airlines lowered fares to get some people to start flying," McAdoo said. "We just don't have that right now. Most planes are full; most flights are profitable."

Many airlines buy fuel in advance and lock into contracts to guard against spikes in oil prices. Jet fuel that planes are burning today is not necessarily a product of the cheaper oil, said George Hobica, founder of

If the price of oil remains low through 2015, as some economists predict, passengers "could see possibly a little moderation, especially in those overseas airfares which are so high," Hobica said.

The International Air Transport Association in Geneva has predicted that fares could drop 5.1 percent next year.

But don't count on it.

"A lot of people, besides consumers, want to get their hands on this windfall," Hobica said. "Stockholders would like to get some dividends; unions would like to get some profit-sharing. In addition, the airlines are improving infrastructure - improving their terminals, buying new planes, refurbishing old planes."

Airline executives know fuel prices could jump again because of terrorism, world events, bad weather, or a disruption in oil production.

"This is clearly not permanent," McAdoo said. "We have low prices, and then we have high prices. Just because oil has been down for six or eight weeks doesn't mean it's going to be down for the next 25 years."

"While fuel prices have abated from historic highs," said Nicholas Calio, chief executive officer of the industry trade group Airlines for America, "focusing on fuel alone ignores the many fixed costs that determine the price of a plane ticket, like aircraft, rent, landing fees, and labor."

Between 2000 and 2013, the Consumer Price Index rose 35 percent, while the average domestic airfare rose 15 percent, the group said. Adjusted for inflation, the average roundtrip domestic fare fell 15 percent.

"Air travel remains a great bargain, and we will continue to keep it a great bargain for customers," American Airlines president Scott Kirby said during a third-quarter earnings investor call. "But in a strong demand environment, we don't have any plans to go off and just proactively cut fares."

Delta Air Lines said that it expects a fuel bill that is $1.7 billion lower next year and that it would invest the profits in new aircraft, employee profit-sharing, dividends to shareholders, and passenger amenities.

Delta's long-range business plan assumes high fuel costs, said chief executive officer Richard Anderson. Jet fuel accounts for about one-third of airlines' operating costs.

Last week, Sen. Charles E. Schumer (D., N.Y.) asked the Departments of Justice and Transportation to investigate why airlines will not lower fares and remove fuel surcharges from some tickets.

"It's safe to say that the airlines can afford to pass at least some of these savings on to the consumer," Schumer said.

Airlines for America responded that the U.S. industry was investing more than $1 billion a month in the business, while keeping only six cents of profit for every dollar of revenue - well below the Standard & Poor's 500 average profit margin, it said.

"Airlines should be treated like every other business," the group said. "When the price of coffee beans falls, no one asks Starbucks why his or her latte does not cost less. You want Starbucks to expand its stores and products, give back to its baristas, and reward investors. Airlines are no different."