Lower Airfare, or Not?
Jack Marks
Wouldn’t it be awesome if the next time you went on vacation your airfare was just magically less expensive. What if I told you that airline companies had the opportunity to do this, but they choose to keep the fares the same and attend to other company need.
Since, the year 2015 various airliners have been saving big bucks on fuel. In 2015, Southwest Airlines announced they saved over $1.7 billion, and Delta airlines announced an even more staggering number at $2 billion in fuel savings (Reuters).
The topic that is being debated by many in this day and age is what to do with all this brand new acquired money. For those of us who enjoy flying a decrease in fair prices would be ideal. "Several of you have asked us if we are pricing to account for the lower fuel prices," said Andrew Harrison, senior vice president of planning and revenue management at Alaska Airlines, during the carrier's quarterly earnings call. "And the answer is no." For, those of us customers these are tough words to hear, but after looking more into these companies, their decision to not lower fare prices and to attend to other company needs makes a lot of sense.
For these companies, the pricing of tickets comes down to demand. Airline tickets are an inelastic good meaning that even though there prices are high there is still a constant demand as people need to fly out of necessity, because when traveling long distances, it is a lot more convenient. So there would be no point to lowering prices, as the increase in demand from lowering prices would be marginal, and would not make up for the profit loss from lowering prices due to the inelasticity.
Instead of lowering prices these companies are attacking other company needs. Most companies are returning a majority of this money back to shareholders and reinvesting it back into the company. Also other companies are attending to debt or service improvement (Reuters).
Overall do not expect airfare prices to lower anytime soon, these companies have other more important needs that need to be attended to. The overall benefit to lowering ticket prices, would be marginal and not be worth it. So unfortunately, all airline ticket prices are staying relatively the same.
Works Cited
“Airline Profits Soar Thanks to Cheap Fuel, High Travel Fees | Money.” Time, Time, time.com/money/4188985/airline-profits-airfare-fees-fuel-costs/.
Reuters. “Despite Big Fuel Savings, Airlines Don't Expect Lower Fares.” Entrepreneur, 2015, www.entrepreneur.com/article/242128.
The airline said Thursday that it expects to save half a billion dollars in the first quarter alone. “Southwest Airlines Is Saving Billions on Fuel.” CNNMoney, Cable News Network, money.cnn.com/2015/01/22/investing/southwest-airlines-earnings-fuel-savings/index.html.
Very interesting story but keeping the prices up is not a huge problem for airlines because tickets are an inelastic good. People will keep flying and paying for tickets even if prices raise because it is the most necessary way to travel most of the time. I had no idea Airline companies were saving this much money from gas and lower ticket prices are ideal, but they would not have to worry about prices unless there was a dramatic decrease in demand.
ReplyDeleteThis post is accurate in the sense that plane tickets are rather inelastic. If people need to travel for business or leisure, they will buy a ticket, especially for the obvious reason if it’s overseas. In addition, many businesses will actually pay for their employees to fly, which takes an added expense off of an individual's’ income. However, it would be somewhat helpful if ticket prices were lowered because it will decrease the overall expenses for a business. I do think it might be a good idea to not actually decrease all prices because then planes will become more cramped, lines will be longer, and quality of the actual planes may diminish. The variable costs of those tickets will also change based on the quantity of tickets sold because people will be more willing to buy tickets, thus increasing the total revenue of the airline company. All in all, I do agree with your conclusion, stating that I highly doubt that airlines will decrease their tickets because people will continue to buy tickets regardless.
ReplyDeleteIt isn't a big surprise that airlines refuse to lower their prices. They under no requirements business-wise to change anything. This actually ties into what we just touched on in class which was oligopoly. The airline business made more than 70% of its profits from 5 major companies last year (American, Delta, Southwest, United, and US Airlines). Because of this, these 5 companies basically can set any price they like and add any regulations or fees they would like. They are the reason you have to pay for each individual bag that goes on a flight now. It doesn't perturb this huge companies as long as they are increasing their profit. It is a bit frustrating and some people even tried to boycott certain airlines like United after all of their incidents early in the year, but United also has the most routes of all airlines in the US, so it is almost impossible to 'boycott' it. Until these businesses step across a line, the government and people will have to put up with the prices they set.
ReplyDeleteOne of the big reasons that airlines are keeping this saved money is to replace their current fleets. Airlines are flying planes that are at least 30 years old, some even older. Not to mention these aging planes are out of date and parts are hard to find. Tying into the fuel costs, these fuel savings are thanks to aircraft like the Boeing 787 and the Airbus A350. These are decently sized planes with huge ranges, and airlines are using these to replace the much larger jumbo jets like the 747 and A380. The insane fuel costs for the 4 engine jets just aren't worth it anymore, and the once Queen of the Sky is starting to be phased out and retired.
ReplyDelete