Airfares set to take off as fuel prices fly
Just like regular consumers at the gas station, airlines refueling in Los Angeles are being forced to adjust to higher prices at the pump.
Jet fuel prices have shot up, and experts say airfares are following suit.
With a busy summer travel season approaching, airlines are starting to pass the costs on to passengers through higher fares and fees.
“Whenever there’s a surge in oil prices, the airlines end up passing that to the consumers immediately,” said Diego Bufquin, director of hospitality management and entrepreneurship at Tulane University. “It doesn’t take a long time.”
Airlines have been struggling around the world since the U.S. and Israel began bombing Iran late last month. Flights have to take longer paths around war zones, and higher fuel costs eat into their already razor-thin profit margins.
Jet fuel prices account for about a third of airlines’ operating costs, so they “cannot afford to wait to upcharge their customers,” Bufquin said.
United Airlines Chief Executive Scott Kirby told CNBC that the spike in fuel prices will have a “meaningful” impact on the airline’s financial results.
Some airlines outside the U.S. have already added fuel surcharges to their ticket fees. Air India announced a phased increase in fuel surcharges on domestic and international routes last week. Hong Kong’s flag carrier Cathay Pacific announced it would charge extra on all fares to cover fuel costs starting Wednesday.
Airlines topping up at LAX and other regional airports are already being hit. Jet fuel prices in Los Angeles have jumped more than 40% since the conflict in the Middle East started.
Just like the price of gas for cars, jet fuel often costs considerably more in California than in other states.
California is largely detached from the rest of the fuel distribution system. With limited pipeline connectivity, it relies more on sea delivery from other states and countries. California also has higher taxes on jet fuel than many other states.
National average gas prices reached $3.71 per gallon on Tuesday, according to AAA. In California, the average Tuesday was $5.52 per gallon.
Still, spring and summer demand is likely to remain strong even if prices rise, said Alan Fyall, an associate dean of the University of Central Florida Rosen College of Hospitality Management.
“Fares are going up, but the demand is still there domestically,” Fyall said. “The only thing that really dampens demand is economic recession.”
Indeed, consumers have been booking earlier than usual to lock in lower prices for their summer travel, airlines said. Delta and American Airlines had some of their strongest-ever single-day sales in March.
“When prices did spike, we saw a spike in demand,” Alaska Airlines Inc. Chief Executive Ben Minicucci said this week, according to Bloomberg. “I think people got this initial, ‘Wow, if this thing is going to go crazy, I better book my fare now before fares go up.’”
Airlines and other industries will face tougher conditions if fuel prices remain high for a prolonged period, he added.
Airfares were already on the rise, according to the Consumer Price Index, which found that the airline fares index rose 1.4% in February compared to last year.
The impact will vary by airline, said Fyall. Many airlines hedge their fuel to negotiate a fixed price, and stock up on fuel while it’s less expensive.
“The airlines that manage their fuel-buying process very well, that hedge very well, tend to be able to offset the price charges quite well,” Fyall said.
Jet fuel prices are even more sensitive to economic forces than auto fuel prices, experts said.
It’s not yet clear if Californians will have to pay significantly higher airfares than their neighbors, but some in-state flight routes could become temporarily unavailable, according to Bufquin. As airlines look to save money, they could cut certain shorter, less profitable routes.
“Budget airlines like Spirit and flights from smaller California hubs like Burbank, San José and Fresno are at risk of being canceled,” Bufquin said.