The answer to this question seems like it would be pretty straightforward and easy, right?
Oil prices fall, which leads to a drop in jet fuel prices, which inevitably leads to cheaper airfare, right?
If you drive a car you probably notice that when the price of oil drops, prices at the pump follow. This is also true for pumping a plane full of fuel. Oil falls, so does the price of jet fuel. So, why doesn’t airfare fall too?
There are plenty of factors that go into determining the price of an airline ticket. Gas makes up for about 25% of that or 1/4th. Logic would tell us that when the price of oil falls, airfare should too. Lets dig into this a little more.
The US government prohibits airlines from charging fuel surcharges on domestic tickets. However, this isn’t the case when flying internationally. This is why you’ll sometime see fuel surcharges in the hundreds when flying abroad.
So Why Aren’t Prices Dropping?
With all the mergers we’ve been seeing with US airlines, we only have four major airlines now in the United States – American, United, Southwest and Delta. These four airlines control upwards of 70% of the market and are rarely in competition with each other. The industry is very overcrowded and air travel is still a very attractive form of travel. When demand is high and competition is low, airlines can charge whatever they want for tickets and reap the huge profits.
Don’t expect airfare to drop anytime soon but do expect them to rise once the price of oil increases!
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