Air Fares Unchanged by Low Oil Prices

Many oil-producing countries may be fretting over the falling prices of their product, but nearly everyone else is enjoying this development. Except, perhaps, air passengers, who may or may not see lower fares in the coming year.

Source: iStock

Source: iStock

The International Air Transport Association (IATA) reports that the drop in jet fuel prices should boost the industry’s profit margins to a record $25 billion after taxes, or an average profit of 3.2%. Profits expected by the end of this year will be $19.9 billion, the association said.

Average airline profit margins haven’t been this high since 2010, when they were 3.1%.

So far there’s been no relief for passengers, IATA says, mainly because carriers are still using fuel that they bought months ago at higher prices. Since June, the average price of crude oil has plunged from about $115 per barrel to under $70 now. But in 2015, the group says, it expects an average oil price of about $85 per barrel.

“The industry outlook is improving,” IATA CEO and Director General Tony Tyler said in a statement on December 10. “The global economy continues to recover and the fall in oil prices should strengthen the upturn next year.”

Still, Tyler cautioned, “While we see airlines making $25 billion in 2015, it is important to remember that this is still just a 3.2% net profit margin. The industry story is largely positive, but there are a number of risks in today’s global environment – political unrest, conflicts and some weak regional economies – among them.”

For example, IATA said the airline industry in North America is expected to perform the best next year, due in large part to industry consolidations. North American airlines’ profits are seen reaching $13.2 billion, up from the $11.9 billion expected this year. In Europe, though, the margin is likely to be 1.8%, IATA said, due to “high regulatory costs, infrastructure inefficiency and onerous taxation.”

And what about air fares? That’s simple: IATA says average fares for air passengers probably will be 5.1% lower in 2015 than this year, once the airlines use up all the fuel they bought earlier at higher prices.

Yet John Heimlich, IATA’s chief economist, noted that airlines, especially those based in the United States, have been busy reinvesting in themselves at the highest rate in 18 years, including improvements to planes, upgraded airport infrastructure, along with increased dividends to shareholders and more pay for employees.

“It is critical to make the investments now and capitalize on the current environment,” Heimlich told The New York Times.

Besides, airlines lack the motivation to reduce fares. Thanks to mergers in the industry, many flights are now full, demonstrating a demand that can fetch a high price.

In fact, one trade group, Airlines for America, argues that air travel is relatively inexpensive even at today’s prices when adjusted for inflation. It reports that while overall consumer prices in the United States have risen 35% since 2000, air fares have gone up by only 22%. This includes the many fees the airlines have tacked on to fares to increase revenues.

So despite the drop in fuel prices, it’s an even bet whether your next airline flight will cost you less.

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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