Recent spike in oil prices expected to boost airfares

September 30, 2019

By Kevin Smith | San Gabriel Valley Tribune

Planning to fly in the near future?

You’ll likely have to dig a little deeper to pay for it after recent drone attacks on Saudi Arabia’s oil production facilities boosted oil prices. And when that happens, higher airfares are typically close behind.

Helane Becker, a managing director and senior research analyst at Cowen, said consumers will definitely feel the effect.

“The airlines will not be able to quickly absorb the spike in oil prices,” Becker wrote in a recent note to clients. “American will likely be most affected as they are the largest consumer of jet fuel in the world.”

In an interview with MarketWatch, Becker said airlines “will look to aggressively raise fares” if the spike in oil prices continues.

“If the airlines are unable to raise prices to offset rising jet fuel costs, they will likely adjust capacity lower by eliminating some frequencies or remove underperforming routes,” she said.

The price of Brent crude surged nearly 20% in early trading on Sept. 16 — just two days after the attack — before pulling back to a 10% hike. That boosted the price by $6 to $66.28 a barrel. By Friday, Sept. 27, the price had pulled back to $56.18 a barrel.

Saudi Arabia’s oil production has rebounded to more than 8 million barrels a day in the wake of the attacks, which makes for a faster than expected recovery. But air travelers will likely still feel impacts.

Airfare price hikes

So what kind of increase can consumers expect?

“We expect to see a 5 to 7% increase in published prices,” said Burt Flickinger III, managing director for the retail consulting firm Strategic Resource Group. “And there will be fewer discount airfares available for people who book two weeks to a few months in advance.”

Airlines sometimes feature discount fares of 40% to 50% off, he said, but rising oil prices have boosted jet fuel costs. Other factors, including problems associated with Boeing’s troubled 737 Max aircraft, also figure into the mix.

“Boeing made mistakes and they were reticent to report them,” Flickinger said. “They tried to cover it up, so what was already a growing crisis increased geometrically.”

A confusing automated maneuvering system on the 737s sent two planes into nosedives, killing a total of 346 passengers. After the second crash in March of this year all 737 Max aircraft were pulled from action. With fewer planes available, airlines are offering a smaller number of discount fares, Flickinger said.

Fewer discount fares

“Now those discount fares might be available for only a fifth of the total seats, where before they would have been available for a quarter or even half of the seats,” he said.

In the past, airlines frequently locked in their fuel fuel costs at a set price for a specified amount of time as a hedge against potential price hikes. Becker said they have moved away from that practice in recent years and now prefer to price their products to reflect current market conditions, which helps to improve their profit margins.

Still, some companies — including Delta, Southwest, Alaska and Hawaiian — continue to hedge jet fuel prices, she said. Becker said airfares tend to track oil prices with a two-to-six month lag.