To What Extent Are Airlines Passing On Fuel Savings? - Hopper Research

To What Extent Are Airlines Passing On Fuel Savings?

Patrick
By Patrick Surry
Posted Nov 5, 2014

Summary

  • Airfare tends to rise more and drop less than fuel prices, although there is a correlation between the two

  • Compared to October 2013, jet fuel prices are down 12%, while consumers are only seeing a 1% decrease in airfare

  • Since December of 2013, airfare has increased 3.6 times faster than airline operating expenses from fuel costs

There has been a lot of recent news about the drastic drop in fuel prices: from September 8th to October 20th Gulf Coast jet fuel prices have dropped 14% from $2.802 per gallon to $2.413 per gallon. Many outlets have cited that even though fuel costs have decreased, the cost of ticket prices for many airlines have gone up.

To get a more complete picture of the effect of fuel price changes and airfare changes (or lack thereof), Hopper’s research team looked at year-over-year changes in price for both Gulf Coast jet fuel and airfare.

On average, 30% of an airline’s operating costs are from fuel costs, meaning, keeping other costs fixed, a 10% decrease in fuel price would equate to a 3% decrease in operating expenses. If airlines did in fact pass all fuel savings on to consumers, one would expect airfare to drop with the estimated drop in operating expenses.

Since 2013, this has not been the case - in months where the fuel price has fallen, fuel-related operating expenses have decreased 1.9% (30% of the fuel drop) and airfare prices remained flat. During the months where fuel prices increased, airfare increased 3.6 times more than estimated operating expenses from fuel (Figure 1). The difference between a change in airfare and a change in operating expenses has averaged 2.5%, meaning that airfares rise more and drop less than would be explained by fuel prices. Screen Shot 2014-11-04 at 1.20.48 PM

Figure 1: Year-over-year Changes in Fuel Prices, Operating Costs, and Airfare