Consumers are unlikely to benefit from lower jet fuel prices.
United Airlines reported a first-quarter net income of $582 million today based on total revenues of $8.6 billion, a record for the company and a welcome reflection of the health of the U.S. airline industry in general. As recently as 2008, domestic airlines were struggling to post operating profits. That year alone, U.S. airlines posted operating losses of $5.6 billion, whereas by 2014 the industry had rebounded to show profits over $12 billion, with all indicators pointing to continued growth as the result of declining crude oil prices.
While lower fuel expenses are the primary element driving industry profits, other significant factors, such as capacity discipline and revenue generated through ancillary fees, also come into play. In spite of the relative health of the industry, consumers shouldn't expect to see lower air fares any time soon.
According to a recent study by IdeaWorks, a consulting company specializing in ancillary airline revenue, in 2013 United earned $5.7 million through a variety of ancillary fees, including checked baggage, onboard food purchases, seat upgrades, premium boarding privileges and miles sold to partner banks as part of various affinity credit card agreements.
Since IdeaWorks began tracking it in 2007, global ancillary revenue revenue has climbed nearly 1,200 percent, from $2.45 billion in 2007, to $31.5 billion in 2013. With numbers like these, ancillary fees, once regarded as unorthodox, are a revenue stream the airlines are loath to give up.
Another reason why air fares remain stagnant in the face of lower fuel costs is the industry's increased emphasis on restrained capacity discipline. When the 2008 financial crisis hit, airlines reduced their flying capacities in response to the sudden decline in demand for air travel. In subsequent years, however, as demand grew, many chose not to add any significant flight capacity. With airline big players United, American and Delta exercising restraint when adding capacity in light of increasing demand for air travel, overall industry fares increased an average 20 per cent between 2007-2014, a major factor behind the airline industry's recovery. However, this could change: in recent news discount airline Transat announced that it would be adding seats on its flights to Paris and other high-volume destinations, a trend also adopted by other discount carriers.
After many lean years, the airlines are once again in the black. Demand remains consistent in spite of higher fares and widely unpopular ancillary fees. With demand being the key component to pricing flights, unless airlines start finding themselves with a consistent surplus of empty seats, it's unlikely consumers will see any of those fuel savings being passed down to them in any substantial way.