why hasnt price of airfare dropped?
Dec 7th, 2014, 05:04 AM
#1
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why hasnt price of airfare dropped?
With gasoline prices below $2.50/gallon in US how come airline ticket prices havent dropped? Need to buy tickets for April, any forecast on waiting? Thanks!
Dec 7th, 2014, 06:17 AM
#2
Airlines purchase their fuel according to long-term contracts that allow them to hedge against fluctuations in fuel prices. When the price of crude oil drops, the oil companies make high profits from those contracts, and when it rises the oil companies take losses (or, actually, just make lower profits.) The intent of this is to permit the airlines to have predictable costs of doing business. They can then market tickets according to demand rather than bouncing them around based on costs.
There's no real incentive for them to lower prices if the planes are already flying 90% or more full. If they can renegotiate their fuel contracts to reflect the lower world prices, they can simply make higher profits off the tickets they sell, and that's the point of the exercise, isn't it?
As for April, sure, you can wait. Ticket prices might float down, or the cheapest fare buckets might sell out, leaving only more expensive buckets, or some merger might result in flights being canceled or equipment swapped...
Just my opinion, but anybody who thinks they can out-guess the airlines' yield management computers is delusional.
There's no real incentive for them to lower prices if the planes are already flying 90% or more full. If they can renegotiate their fuel contracts to reflect the lower world prices, they can simply make higher profits off the tickets they sell, and that's the point of the exercise, isn't it?
As for April, sure, you can wait. Ticket prices might float down, or the cheapest fare buckets might sell out, leaving only more expensive buckets, or some merger might result in flights being canceled or equipment swapped...
Just my opinion, but anybody who thinks they can out-guess the airlines' yield management computers is delusional.
Dec 8th, 2014, 05:14 AM
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Gardyloo, great answer. Who can ever figure the airlines. If you can ever predict there reasoning, you are amongst the super natural. I give up. I need tickets in May for Arizona. I am waiting it out.
Dec 8th, 2014, 10:16 AM
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I think their primary way to control fuel prices is to buy options. So if fuel is available today at $100, they buy an option to buy fuel in 90 days at $100. That kind of option is fairly cheap, but gives you control of the amount of fuel specified, in the future. If in 90 days, the cost of fuel is over $100, you win. If in 90 days, the cost of fuel is under $100, you tear up the option and buy at the lower price, again you win. If in 90 days, the cost of fuel is $100, you lose what you paid for the option.
I've oversimplified what can be a very complicated procedure. Airlines don't pull up to the pump and say fill her up; they buy huge quantities under long or short term contracts, depending on many factors. It is safe to say that the price of oil you read about in most papers isn't used in many sales, because you can usually get a better price by contracting for a large quantity. What you read in the paper is the spot price quoted when someone has not worked the hedging and contracting well, and needs to buy or sell some fuel right away.
You are right that no one but an insider knows all the factors that go into setting prices, and the many changes in the industry in the last decade or more have made those of us who thought they saw a pattern realize that there is no longer a pattern.
Incidentally, I've read that Delta is offering some attractive prices on front-cabin seats.
I've oversimplified what can be a very complicated procedure. Airlines don't pull up to the pump and say fill her up; they buy huge quantities under long or short term contracts, depending on many factors. It is safe to say that the price of oil you read about in most papers isn't used in many sales, because you can usually get a better price by contracting for a large quantity. What you read in the paper is the spot price quoted when someone has not worked the hedging and contracting well, and needs to buy or sell some fuel right away.
You are right that no one but an insider knows all the factors that go into setting prices, and the many changes in the industry in the last decade or more have made those of us who thought they saw a pattern realize that there is no longer a pattern.
Incidentally, I've read that Delta is offering some attractive prices on front-cabin seats.
