Cheaper air fares? Don’t hold your breath!

Travelzoo explains the anatomy of a flight ticket and why plummeting oil prices won't immediately benefit UK consumers.

BRITAIN’S finance minister George Osborne said recently that the five year low in oil costs should be passed on to the consumer via lower flight prices, sparking much debate about potential cost reductions flight travellers can expect in the coming months. 

Travelzoo's flight Deal Experts predict that the main beneficiaries will be travellers who opt for a driving holiday either at home or on the continent and that flight prices are not likely to drop in the immediate future.

Joel Brandon-Bravo, Travelzoo's UK managing director, said: ‘Historically, low oil prices have not necessarily led to an immediate fall in flight prices. For the major airlines, we would however expect some softening of the headline price in the medium term as the fuel surcharges will inevitably fall. This will probably take around six months because the airlines have hedged positions that protect them from volatility in the fuel market, but they will now be working to unwind the hedges and take advantage of lower fuel costs.

‘It is typical of the government to point the finger of blame at the travel industry when up to half of a flight's cost is often made up of taxation and other fees airlines are obliged to pay to airports and authorities. 

The British public will no doubt be surprised to hear that many airlines are operating at a less than 1% margin, even with falling fuel prices. 

Fuel costs make up around a third of the total cost for airlines such as British Airways, but this percentage can go up to over 50% for the low-cost airlines.

‘At this stage the only immediate benefit will be for those who opt for a driving holiday – especially if they drive to Europe where the weak euro is also offering good savings on accommodation and food.’

These are some of the reasons why Travelzoo doesn’t expect immediate cuts in flight prices:

• No business wants to manage on the short term. Oil pricing is very volatile. Just because it is down right now, doesn't mean it won't spike again quickly.

• Airlines often hedge their oil purchasing. As such, the cost is fixed for a period of time. Adjusting fares based on market rates when their cost is fixed doesn't make sense. 

• Fuel is just one cost that goes into fare pricing. Airlines state that operating expenses have in fact risen by up to 3% over the past year.
• Just because fares haven't dropped doesn't mean passengers aren't getting additional value. Many airlines are re-investing their profits into providing product improvements. That could mean kitting out planes with Wi-Fi or offering perks for the various fare classes – including economy.
• There is no incentive for airlines to lower prices; demand remains high and planes continue to be packed.

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Picture Credit: "Oil Price Perormance Chart" courtesy http://moneyweek.com/prices-news-charts/oil/ ; "Jet fuel Vs Airline fares chart" http://blogs.wsj.com/economics/2015/01/16/why-a-big-swing-in-jet-fuel-costs-brings-small-change-to-airfares/