Even if fuel prices fall...why might airlines stick to high ticket prices?

Dubai, United Arab Emirates - The sharp rise in the cost of aviation fuel as a result of the war on Iran will lead to a significant increase in air ticket prices. But don't expect prices to fall once fuel prices decline, as price increases are driven not only by the cost of fuel, but also by strong demand for travel.

Despite the increase in ticket prices, travelers continue to book in record numbers with many airlines. Therefore, as long as passengers continue to travel, prices are likely to remain high regardless of the cost of fuel.

“The longer consumers accept these prices and the longer airlines get used to this revenue stream, the more likely they are to continue,” United Airlines CEO Scott Kirby said during an earnings call Wednesday. The company's customers now pay an average of 20% more per mile (1.6 kilometers) traveled compared to last year.

When asked about keeping prices high when fuel prices return to normal, American Airlines CEO Robert Isom noted that customers have already shown a willingness to pay more for benefits such as extra legroom or seats closer to the front of the plane. “I'm optimistic about what this means for our business,” he told analysts Thursday.

He added that summer bookings remained strong despite the rise in prices, noting that what is happening reflects a realization that “travel is still a good deal.” The price of jet fuel, which has nearly doubled since the beginning of the year, is a major factor behind the widespread price increases, as it constitutes the second largest operating cost for airlines after wages.

America's four largest airlines - United, American Airlines, Delta and Southwest - spent an average of about $100 million a day combined on fuel last year, during a period of relatively low oil prices. Today, it is paying billions more, as Delta reported that it incurred an increase in fuel costs amounting to two billion dollars in the current quarter alone.

Airlines pass part of these costs on to consumers. Recent results show that it is already charging passengers about 20% higher prices per mile than last year, with expectations of further rise.

Southwest Airlines Chief Operating Officer Andrew Watterson told investors Thursday that the sector has already seen five price increases since the beginning of the year, with more expected. All airlines reported that they only recovered part of their increased costs.

Airfare prices are not based solely on costs, but ticket prices are not determined solely by how much it costs to operate a flight, as From the Tray Table author Zach Greif explains. The price is primarily determined by demand, whether on a particular route, a specific time of day or week, or the level of competition.

For example, mid-week or overnight flights are usually cheaper than flights during peak times on the same route, such as Friday afternoon. Passengers on popular long-haul flights between major cities, such as New York and Los Angeles, also pay less per mile than on shorter flights with limited demand.

Airlines have begun to reduce some of these less profitable flights, which have turned into a waste of money as fuel prices rise. United, for example, reduced its planned flight schedule by about 5% until September.

Canceling these low-priced tickets would contribute to raising the average ticket price. As travelers continue to book tickets, airlines realize their ability to lock in higher prices on their remaining flights.

“The price environment will ultimately be determined by market conditions,” Watterson said. There is also the possibility that Spirit, a pioneer in offering ultra-low fares, could falter under the pressure of rising fuel costs.

The company has declared bankruptcy twice over the past two years, and warned in March of the possibility of going out of business. The Trump administration has indicated that it is considering the possibility of supporting or even acquiring it to keep it running.

Even if it survives, it will likely become smaller, with other low-cost airlines facing similar difficulties. “If you remove low-cost competition from the equation, companies like United and others are more likely to be able to maintain these high prices for a long time,” Greif said.

Whatever investors and analysts think about airlines' attempts to maintain high prices even with falling fuel costs, this trend has drawn criticism. Rep. Ritchie Torres, a Democrat from New York, sent a letter to Kirby after his remarks, writing: “United publicly plans to keep a significant portion of fuel savings rather than pass them on to passengers.

“Ordinary Americans, many of whom can no longer afford air travel, deserve better than this level of corporate greed.” United declined to comment on Torres’ letter.