Originally Posted by FWAAA
You posted that you couldn't understand why tickets were going up even though the price of oil was trending down, as if you expected some sort of correlation between the two.
Of course, sky-high oil prices make airline execs wish they could dramatically raise fares, but their ability to do so is, as you point out, constrained by the supply/demand reality. Airline seats cost what we demonstrate we are willing to pay, and don't fluctuate with the price of oil.
Wanna know why fares are going up and will continue to do so (as long as the domestic capacity situation allows it) for the immediate future?
Here's an example: In 1998 and 1999, AA paid an average price of $0.55/gal for jet fuel. Yields (average fare paid by paying pax to fly one mile) were 13.49 cents and 13.12 cents, respectively.
Fast forward to 2005: AA paid an average of $1.72/gal for fuel and yet fares were down: AA's yield was 12.01 cents. In the fourth quarter, AA paid $2.02/gal and yields were 12.28 cents, still a penny per mile less than the 1998 and 1999 average yield. Yields have improved dramatically since the lows of 2002-03, but they are still less than in 1998-99.
Today, AA is still paying three times as much for fuel as in 1998 and 1999 (per gallon prices are dropping, but are still north of $1.65/gal).
Expect fares to rise (if AA can raise them) no matter what happens to oil. Free oil won't cause AA to lower fares (unless there's a glut of seats).
To the OP: AA's fares are high? Hardly. Millions of fares, and they change frequently. Sometimes multiple times each day. In the end, AA charges just about what UAL does.
You have some valid points, but I still disagree with the point that oil has no correlation to price changes. Let's say bottom line, AA has to maintain it's costs vs. gross revenue. Gross Revenue minus cost is profit. Assuming that any business has a bottom line, Oil WILL affect how much you charge per seat, per person. Now, does that mean price adjusts directly? Probably not. AA's model of pricing surely focuses on making money on profitable routes vs. non-profitable routes.
For example, ORD-LGA may cost $150 and STL-LGA may cost $300. Supply and demand as you stated creates different pricing strategies accross markets.
However, the AVERAGE of prices accross the board will be affected by OIL, costs of maintanence, labor, etc. That's the only way the business will be profitable. Some ticket prices are inflated to cover cheaper tickets which create different supply and demand curves. So you are correct in saying that price isn't directly correlated to ticket prices... but in the end they do affect the costs of your business.
The same is true for our (own business). While i don't price each customer the same... my average price accross the board has to cover my costs no matter what. Because our business depends on Road transportation a lot, oil is a big concern for us. Fuel Surcharges range in the 20-30% range. We had to respond, like all of our vendors/competitors accordingly.
I don't see why the overall Cost of Jet Fuel (an major part of maintaining and flying planes) would not affect ticket prices in any way. Pricing may not correlate directly to oil due to market dynamics but average prices will go up.
Your yield comparison makes sense but i offer another explanation. The costs of other factors: labor/pilots/food costs were cut in response to oil increase. why else are so many airlines struggling? Of course there are other factors but pick up any wall street journal and you'll likely see airline earnings talk about high fuel costs.