Cost of oil plummets, when will airfares follow - as if!
Dec 5th, 2008, 09:41 AM
#1
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Cost of oil plummets, when will airfares follow - as if!
I booked a flight recently and the "fuel surcharge" was still included in the fare. OK fair enough (fare enough) if they bought the fuel last month for flights next month.
But what are the chances we'll see any drop in air fares even with the drastic drop in the cost of fuel?
(Just hope the other airlines will be as smart as SW was and purchase as much as they can store and then be savvy about futures.)
But what are the chances we'll see any drop in air fares even with the drastic drop in the cost of fuel?
(Just hope the other airlines will be as smart as SW was and purchase as much as they can store and then be savvy about futures.)
Dec 5th, 2008, 11:03 AM
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Airlines aren't expected to make a profit for this year. In the meantime, booking more than three months in advance is not a good idea. IMO. Airfares to Europe are around $1350 for next summer. That is more than when gas was $140 a barrel.
I think a lot of people are just tired of all the hidden fees when flying. And the hassles! With gas at $1.80 a gallon, why not go someplace closer and drive.
On a recent flight with Delta, the flight attendant was threatening everyone that if you try to put more than one bag in the overhead bin, you will be arrested and removed from the aircraft. It certainly didn't make me enjoy the flight.
And with all the cuts the U.S. airlines have done, if they want me to fly them internationally, they better be over a hundred dollars cheaper than the foreign carriers.
Sorry, I think I turned your thread into a rant!
I think a lot of people are just tired of all the hidden fees when flying. And the hassles! With gas at $1.80 a gallon, why not go someplace closer and drive.
On a recent flight with Delta, the flight attendant was threatening everyone that if you try to put more than one bag in the overhead bin, you will be arrested and removed from the aircraft. It certainly didn't make me enjoy the flight.
And with all the cuts the U.S. airlines have done, if they want me to fly them internationally, they better be over a hundred dollars cheaper than the foreign carriers.
Sorry, I think I turned your thread into a rant!
Dec 5th, 2008, 04:01 PM
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The flight attendant really got mad at this guy; I think we was Australian, because he wanted to put a little package in the overhead bin and was told that it had to go under the seat. He was warned the rules for flying and how he could be removed from the plane for not following the instructions of the flight crew.
It really ruined the flight. I wish I would have gotten his name. It was on the Atlanta to WPB flight.
It really ruined the flight. I wish I would have gotten his name. It was on the Atlanta to WPB flight.
Dec 5th, 2008, 04:17 PM
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One of the complexities is that many airlines, faced with the recently soaring prices, entered into hedge contracts in which they agreed to pay prices that are now above market. As with all hedging, there is inherent risk, and this time they lost. So though the market price has sunk (relatively) their cost remains higher for the term of the hedge contract.
Dec 5th, 2008, 07:37 PM
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Fares haven't collapsed because most airlines have significantly cut capacity. United's domestic capacity for Nov 2008 was almost 20% lower than Nov 2007. Other airlines have cut around 10-15%.
Exception was Southwest, which held capacity about constant. But they suffered the worse load factor drop, of about 7% compared to Nov 2007; and even they announced they will start cutting back.
This is unlike other downturns when airlines flood the marketplace with excess capacity, driving fares down. Not this time. At least not yet.
Exception was Southwest, which held capacity about constant. But they suffered the worse load factor drop, of about 7% compared to Nov 2007; and even they announced they will start cutting back.
This is unlike other downturns when airlines flood the marketplace with excess capacity, driving fares down. Not this time. At least not yet.
Dec 6th, 2008, 04:48 PM
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The price of oil we all read about is the spot price for immediate purchase of a barrel of oil. However, airlines don't use oil; they use aviation fuel, which is made from oil. Other thinks, like gasoline and heating oil, are also made from oil, so it is possible the refineries are making more of these other products now, which would mean less aviation fuel is available, which should mean that it costs more than it would when they are cranking out a lot of it.
Further, they don't just pull a plane up to the pump and say fill it up. The airlines buy in huge quantities, under a contract that may obligate them to pay and accept delivery over at least a few months, so the fuel they are using today was probably purchased at the presumably higher price a few months ago when oil was dearer.
I would be surprised if an airline bought a huge amount of fuel for immediate delivery; where would they put it? I think it is far more likely that they buy the huge amount for delivery over a few months, which, again, means that they are paying today what the price was when they signed the contract, which could be far more than they could contract for today.
Hedging, or the use of options, which Southwest apparently did to their advantage, isn't buying fuel; it is buying the right, but not the obligation, to buy at the specified price during the life of the option. My experience in other commodities is that options are dirt cheap, but very often become worthless. Say the price of aviation fuel today is $50 a barrel. I think it will go up, so I pay $2 a barrel for the right to buy at $55 anytime in the next three months. Two months later I need the fuel, which is now selling at $49 a barrel. Do I use the option? No, because I can buy without the option at $49. The actual cost of the fuel is $51, since I had bought the now worthless option, and also paid for the fuel. But, assume the price of the fuel is now $60! Do I buy it for $60, or for the option price of $55? The answer is obvious. The actual cost of the fuel to me is $57, which includes the cost of the option.
So the hedging can protect against an increase in the price of the commodity, but only to a degree, because if the current price of fuel is now $60, an option to buy it at $55 is going to cost a lot more than the $2 cited above.
Hedging can protect to a degree against increasing commodity prices, but there is always a question of how certain you are of the trending price, and how much you are willing to invest in the options. Its such a common business strategy that I am amazed at the implication that Southwest was the only airline doing it! I think it is more likely that they were willing to bet big on their strategy, and were lucky in their timing.
I'm not confident the fuel surcharges will ever disappear. They are part of the new strategy to advertise a basic price, and then add in a lot of charges for stuff that used to be included in the basic price, such as baggage, food, booking by phone, aisle seating, and whatever else they can think of. Pretty soon one of them will come up with a toilet surcharge.
Further, they don't just pull a plane up to the pump and say fill it up. The airlines buy in huge quantities, under a contract that may obligate them to pay and accept delivery over at least a few months, so the fuel they are using today was probably purchased at the presumably higher price a few months ago when oil was dearer.
I would be surprised if an airline bought a huge amount of fuel for immediate delivery; where would they put it? I think it is far more likely that they buy the huge amount for delivery over a few months, which, again, means that they are paying today what the price was when they signed the contract, which could be far more than they could contract for today.
Hedging, or the use of options, which Southwest apparently did to their advantage, isn't buying fuel; it is buying the right, but not the obligation, to buy at the specified price during the life of the option. My experience in other commodities is that options are dirt cheap, but very often become worthless. Say the price of aviation fuel today is $50 a barrel. I think it will go up, so I pay $2 a barrel for the right to buy at $55 anytime in the next three months. Two months later I need the fuel, which is now selling at $49 a barrel. Do I use the option? No, because I can buy without the option at $49. The actual cost of the fuel is $51, since I had bought the now worthless option, and also paid for the fuel. But, assume the price of the fuel is now $60! Do I buy it for $60, or for the option price of $55? The answer is obvious. The actual cost of the fuel to me is $57, which includes the cost of the option.
So the hedging can protect against an increase in the price of the commodity, but only to a degree, because if the current price of fuel is now $60, an option to buy it at $55 is going to cost a lot more than the $2 cited above.
Hedging can protect to a degree against increasing commodity prices, but there is always a question of how certain you are of the trending price, and how much you are willing to invest in the options. Its such a common business strategy that I am amazed at the implication that Southwest was the only airline doing it! I think it is more likely that they were willing to bet big on their strategy, and were lucky in their timing.
I'm not confident the fuel surcharges will ever disappear. They are part of the new strategy to advertise a basic price, and then add in a lot of charges for stuff that used to be included in the basic price, such as baggage, food, booking by phone, aisle seating, and whatever else they can think of. Pretty soon one of them will come up with a toilet surcharge.
Dec 7th, 2008, 07:37 AM
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I have seen a number of stories indicating that various airlines have begun to reduce or eliminate their fuel surcharges. Some amount just to a few dollars, others are more substantial, particularly for some Asian carriers. One article is below:
http://news.bbc.co.uk/2/hi/uk_news/politics/7765885.stm
Also, for some destinations, fares have fallen markedly over the past month or so. I think much of that has to do with low load factors, rather than the elimination of fuel surcharges but the result to the passenger is similar, a lower ticket price. Thus, fares to Latin America have fallen hundreds of dollars on some routes, same to Mexico, and to some US destinations.
http://news.bbc.co.uk/2/hi/uk_news/politics/7765885.stm
Also, for some destinations, fares have fallen markedly over the past month or so. I think much of that has to do with low load factors, rather than the elimination of fuel surcharges but the result to the passenger is similar, a lower ticket price. Thus, fares to Latin America have fallen hundreds of dollars on some routes, same to Mexico, and to some US destinations.
Dec 7th, 2008, 07:55 AM
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I have a suggestion:
Decide how much you can afford and want to spend to fly where you want to fly. If the airfare is equal or less than that price, then buy. If not, then you don't go.
I know it is a novel idea, but it sure beats complaining about fuel surcharges or bag fees or whatever. I mean, why do we not have threads like "cost of oil plummets, when will Gucci lower prices"?
Air travel is very rarely a necessity. It is a luxury. Choosing to pursue that luxury should come with the acceptance that you have to pay what you have to pay.
Decide how much you can afford and want to spend to fly where you want to fly. If the airfare is equal or less than that price, then buy. If not, then you don't go.
I know it is a novel idea, but it sure beats complaining about fuel surcharges or bag fees or whatever. I mean, why do we not have threads like "cost of oil plummets, when will Gucci lower prices"?
Air travel is very rarely a necessity. It is a luxury. Choosing to pursue that luxury should come with the acceptance that you have to pay what you have to pay.
Dec 8th, 2008, 08:18 AM
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We opted for a cruise this winter break. Great news, got a letter from Carnival this weekend, said they are refunding the fuel surcharge (I think it is $9 pp/pday) it is in the way of shipboard credit. But I have a feeling it not be a problem to spend it.
