Grumpy
10-09-2008, 09:02 AM
By SAMANTHA BOMKAMP (http://search.nwsource.com/search?sort=date&from=ST&byline=SAMANTHA%20BOMKAMP)
Associated Press
Since oil prices have fallen off recently, why haven't airfares fallen too?
Fuel makes up about 40 percent of the total budgets of most major airlines. And in the past year, as the price of oil — and in tandem, the price of jet fuel — has skyrocketed and surpassed labor as their biggest expense.
But since hitting a record in mid-July, the price of crude has fallen by roughly a third amid slowing demand and growing economic concerns. That's easing the near-term worries of major airlines, but many are still skittish that prices could go back up.
Many airline executives also point out that fuel is still costing them more than a year ago. Oil prices, despite the pullback, are about 25 percent higher than this time last year.
During the second quarter, US Airways spent $1.1 billion on fuel and related costs — up 65 percent from a year earlier. Delta shelled out $1.68 billion, compared with $1.11 billion a year ago.
Chairman and Chief Executive Gerard Arpey of American Airlines parent AMR Corp. has said falling oil prices won't guarantee falling ticket prices. He noted that even when the airlines were posting profits, they lagged other companies in return on investment. All U.S. carriers, except for Southwest Airlines, lost money in the first half of the year. Southwest was spared mostly because of fuel hedging — financial transactions it uses to lock in lower prices for most of its fuel.
But while oil prices have a huge impact on airfares, they are just part of the story.
Another huge driver for airline fares is the classic balance of supply and demand, noted Bob Harrell of New York-based travel and aviation consulting firm Harrell Associates. And although demand is down this fall as consumers pinch their pennies, he said, supply is lower as the major carriers' capacity cut plans are implemented. Capacity is expected to go down even farther later this year and early in 2009, as airlines' long-range plans go into effect. So the airlines still have a bit of the upper hand when it comes to keeping prices where they are, Harrell said.
However, Harrell suggests that as the financial crisis unfolds further, fares could be readjusted if the economy gets worse and demand falls off.
"When that happens, people aren't selling cars, they aren't buying refrigerators and they aren't flying," he said.
Associated Press
Since oil prices have fallen off recently, why haven't airfares fallen too?
Fuel makes up about 40 percent of the total budgets of most major airlines. And in the past year, as the price of oil — and in tandem, the price of jet fuel — has skyrocketed and surpassed labor as their biggest expense.
But since hitting a record in mid-July, the price of crude has fallen by roughly a third amid slowing demand and growing economic concerns. That's easing the near-term worries of major airlines, but many are still skittish that prices could go back up.
Many airline executives also point out that fuel is still costing them more than a year ago. Oil prices, despite the pullback, are about 25 percent higher than this time last year.
During the second quarter, US Airways spent $1.1 billion on fuel and related costs — up 65 percent from a year earlier. Delta shelled out $1.68 billion, compared with $1.11 billion a year ago.
Chairman and Chief Executive Gerard Arpey of American Airlines parent AMR Corp. has said falling oil prices won't guarantee falling ticket prices. He noted that even when the airlines were posting profits, they lagged other companies in return on investment. All U.S. carriers, except for Southwest Airlines, lost money in the first half of the year. Southwest was spared mostly because of fuel hedging — financial transactions it uses to lock in lower prices for most of its fuel.
But while oil prices have a huge impact on airfares, they are just part of the story.
Another huge driver for airline fares is the classic balance of supply and demand, noted Bob Harrell of New York-based travel and aviation consulting firm Harrell Associates. And although demand is down this fall as consumers pinch their pennies, he said, supply is lower as the major carriers' capacity cut plans are implemented. Capacity is expected to go down even farther later this year and early in 2009, as airlines' long-range plans go into effect. So the airlines still have a bit of the upper hand when it comes to keeping prices where they are, Harrell said.
However, Harrell suggests that as the financial crisis unfolds further, fares could be readjusted if the economy gets worse and demand falls off.
"When that happens, people aren't selling cars, they aren't buying refrigerators and they aren't flying," he said.