Weekend survey: Are the latest fare hikes fair?

Here’s a question I’ve been getting a lot since the beginning of the year: Are the current round of airfare hikes justified?

Sure, energy prices are rising with the turmoil in the Middle East. Jet fuel prices are up more than 50 percent from a year ago.

But don’t airlines hedge their fuel purchases? (Hedging allows airlines to pre-pay for their fuel, offsetting the risk of higher prices.)

With airline ticket prices up by an average of more than $50 since the beginning of the year, are carriers just trying to cover their increased costs — or are they exploiting our expectations that ticket prices will rise, when, in fact, they have no reason to?

At least not yet.

Here’s the survey.

Beyond that, how are the latest fare increases affecting your spring and summer travel plans?

Are you going to stay closer to home to avoid higher prices at the pump or on the plane? Or are you going to travel, regardless?

Please share your comments. I’ll close the poll and post the results after the weekend, as always.

(Photo: Kona bish/Flickr Creative Commons)

  • http://www.thetravelinggiraffe.com Crissy

    I think that whatever the market will bare is fair. It’s not like there is a baseline price (except the ones in our heads) as to what a flight should cost.

  • SirWired

    It’s not like the airlines have been raking in money hand over fist… They’ve managed to collectively turn a profit recently, but they have a LOT of losses to catch up on.

    If you think the tickets cost too much, don’t buy one! Leisure markets are notoriously price sensitive, and while they aren’t exactly profit centers, they are a valuable source of cashflow. If you think the price is too much, send the airlines a message by not going! Complaining here is not exactly destined to change their minds.

    And not all airlines hedge, nor do hedges completely protect them from fuel price increases. Even the ones that do hedge have to go purchase new hedges for the future, and those cost more than they used to. Not even SouthWest, who does this a lot, can lock in fuel prices in perpetuity.

  • Tom

    A bigger question is why are oil prices increasing anyway — this always seems like a scam.

    Tough for airlines to completely hedge — it’s expensive and only pays off in oil prices are rising rapidly. Fuel traditionally consumes 25 percent of the cost so even a 50 percent increase in the price of oil should only translate into a 12 percent increase in airline costs.

    That said, airlines are deregulated and no longer act on a cost-plus government guaranteed profits basis. Airfares are set based on what customers will pay and it’s likely that any increase in airfares at this stage of the recovery will dampen demand.

  • Arizona Road Warrior

    @ SirWired – “And not all airlines hedge, nor do hedges completely protect them from fuel price increases.”
    - – - – - – - – -
    An airline is NOT going to hedge 100% of their fuel costs. I remember reading an article recently showing what percentage that each airline hedges…the range was 10% to 30%.

    @ SirWired – “Even the ones that do hedge have to go purchase new hedges for the future, and those cost more than they used to.”
    - – - – - – - – — – - -
    You are correct. Given the current price of $ 3.12 per gallon for jet fuel, what airline want to lock in that price IF fuel prices drops. Also, given the politicial unrest in the Middle East, who want to sell a jet fuel hedge contract. Please remember that the seller is betting that the fuel price is going down and the buyer is betting that the fuel price is going up. What jet fuel sellers are thinking that fuel prices are going to drop in the short-term?

    The realities are that no airline hedges 100% of their fuel costs; fuel hedges do expire and the new fuel hedges can be expensive than the previous fuel hedges.

  • Bill

    Hard to argue that fares are too high when the airlines are barely breaking even.
    If you want quality airlines to survive you have to pay for them.

    At look at the price of fuel!

  • Bill

    Now ask a far more troublesome question – Is the price of fuel going up too fast?
    There is NOT a supply problem. So where is the extra money for these higher rates going and why isn’t someone explaining this a a rational way?

  • Arizona Road Warrior

    In a recent (3/9) article, John Heimlich, Vice President and Chief Economist for the Air Transport Association (ATA) offered his expert view of the current crisis over the price of jet fuel and its impact on U.S. airlines:

    “In 2011, airlines have been contending with rapidly climbing jet-fuel prices that have outpaced crude-oil prices to reach their highest level since September 2008. As of March 4, U.S. Gulf Coast jet fuel sold for $3.20 per gallon. Excluding hedge gains or losses, if U.S. airlines had to contend with $3 per gallon jet-fuel prices for all of 2011, their fuel bill would increase $15 billion, from $39 billion in 2010 to an estimated $54 billion in 2011.

    The cost of jet fuel is typically an airline’s largest cost center. Annually, a 1 cent increase in a gallon costs U.S. airlines $175 million; a $1 increase in a barrel costs them $415 million. To put this into some context, in 2010, U.S. airlines posted an estimated net profit of $3 billion with a meager 2 percent margin, one of only three profitable years in the entire decade. From 2001-2010, U.S. airlines had a cumulative net loss of approximately $54 billion.”

    If the airlines have to pay $ 3.00 per gallon for jet-fuel prices (current price as of March 4th was $ 3.20 per gallon), it will add an additional costs of $ 15 billion to their balance sheets and last year, the collective net profit for the US airlines was $ 3 billion. The airlines can’t absorb or eat this $ 15 billion of costs.

    The long-term solutions are: 1) nuclear energy…it is okay for everyone to point to France for their nuclear energy program but we can’t build a new plant in the US; 2) ethanol…it is okay for everyone to point to Brazil (a large agricultural producer) for their ethanol program (nearly 100% of their gasoline is ethanol) but if the US is accused of starving the third-world countries by going ethanol; 3) start drilling for oil in Alaska; 4) start drilling for oil off-shore; 5) natural gas; 6) gray energy; 7) alternative energies; etc.

  • Dave Burge

    The only flying I’ve done over the last few years has been from small regional airports in the Carolinas and vicinity through ATL to HAN. I’ve paid as high as $2600 and as low as $1300. I can get a RT now for less than $1300. Prices rising too fast? Um, expensive gasoline and jet fuel, right? And, I can fly for less. I’m not complaining.

  • MeanMeosh

    Chris, my apologies in advance for this semi-rant, and I say this with all due respect, but this attitude is exactly the problem. You complain when airlines raise fees. Now you turn around and complain when they raise base fares, which, quite honestly, is far more transparent than raising baggage fees or instituting some kind of new fee. What do you expect the airlines to do, exactly? If you’re going to complain that the airlines are exploiting the market by raising fares, I’m sure they’ll be happy to raise checked baggage fees by $25 the next time instead.

  • cjr

    It’s rather mind numbing, really. Gas goes up $.05 at the pump, and they go up $10 for a plane ticket.

    There’s a rather large disconnect there.

  • Brooklyn

    I need to move a truckload of furniture across the country in the next month or two and am very worried about the increase in gas prices. I’d planned to rent a truck one-way and combine the move with a vacation at the other end, but I doubt that I can afford it. I assume that moving companies will also hike their prices. The situation in the Middle East is serious but probably not very long-lasting, so it seems that the price of gas – and presumably of fuel for the airplanes as well – is being artificially hiked.

  • Carver

    I concur with Sirwired. The question assumes a baseline pricing which only exists in our minds. Tickets, like most others items, are a product of supply and demand.

    During the worse part of the recession i would regularly purchase tickets from SFO to LAX or Orange county for $39 each way, occassionally $29 each way, and once for $24.50 each way. This ticket was often purchased with less than 24 hours notice, My upgrade cleared each time, and there would still be empty seats on the plane andnotably in first class.

    Since the economy has recovered (somewhat) and American has cut capactiy. That same ticket bottoms out at about $49 each way, and generally averages about $89.00 each way.

    Yet it is still far less than the $170 each way during the late 1990s, early 2000s when Silicon valley was flush with Venture capital money.

  • David

    Went to book a flight from SNA to LAS. 250 miles or so. It was going to be $790 for two people on Southwest. So we’ll drive. Sorry SWA, I understand you want more cash, but $400 pp is almost double what we paid two months ago.

    How are those empty seats working out for you?

  • Bunnee

    Frankly, I’m not sure it matters why the fares are going up or how the airlines justify it. They are unregulated so they can charge whatever we are willing to pay. They could as easily say that the fares are going up because their stockholders want dividends. The turmoil surrounding the price of fuel just gives them some plausibility at most.

  • Mark K

    I have been looking to fly from DEN to IAH on Easter weekend. The fare shown on CO has actually gone DOWN $40 in the past two weeks despite all the increases. But the fare was extremely high for that wekend to start with, so I think this is more an issue of demand based pricing (CO thought there would be high demand for the weekend and initially priced high) than fuel prices.

    Most airlines are just waiting for a reason to raise fares that doesn’t sound like a money grab. What better excuse than to blame the high price of fuel.

  • http://oussamastake.blogspot.com/ Oussama

    Fuel Hedging is a dilemma for airlines especially after the dramatic drop of oil prices in 2009/2010 which actually cost the airlines a lot of money. Rising fuel prices are usually tackled by a fuel surcharge which different airlines manipulate by lowering or increasing depending what they want to do with fares. One thing to remember was that fuel surcharges remained for up to 6 months after oil prices dropped to compensate for any losses.
    What will raise fares is going again to be the tight control of capacity just like what happened in 2010 and we may alsol see a hike in ancillary fees such as baggage using the oil prices as an excuse.

  • http://nmdfreelance.com Nancy

    Two months ago, a ticket from TUC to MEM, $200. This week, TUC to MEM, $550.

    More than a 200% rise in the price of a ticket? Same airline, same trip, same route – all that changed was the airline’s idea of “Let’s gouge the customer”.

    Even if you factor in that travel to Memphis is on the rise in the spring, I don’t know you can justify or rationalize this. Even the city’s biggest festival of the year, Memphis in May, the cost of tickets shouldn’t be that high!

  • Scott

    @cjr: Sorry, I think the only disconnect is in your head.

    I don’t know where you live, but I just returned from two weeks overseas. Gas prices went up FIFTY CENTS PER GALLON while I was gone.

    Besides that, you are comparing the cost change for ONE GALLON of gas to the ticket price to fly (most likely) THOUSANDS OF MILES. Does $.05 (per gallon) equal $10 (per round-trip plane ticket)? Actually, in your comparison, the plane ticket is a bargain.

  • cjr

    “Sorry, I think the only disconnect is in your head.”

    No disconnect at all. As I’ve pointed out in another thread, prices have skyrocketed here as well.

    But, in the end, things are still relative. Can you really chalk up half a dozen fare increases to fuel? I doubt it.

    This is as much about the airlines simply seizing on the chance to raise prices period as anything else.

  • http://www.asdfghjkl.org Fred

    As some people have said, it really is supply and demand that dictates prices, rather than a ‘fair’ price based on fuel costs and whatever else. Without government regulation or subsidies, there is no reason for the airlines not to charge what the market dictates.
    Also, if flights are ‘fuller than ever’, these ticket prices are clearly working fine for the airlines and the customers (otherwise we wouldn’t buy them).