Travellers' delight: Falling oil prices mean cheaper air fares

With fuel prices down by two-thirds from the dizzying heights of mid-2014, when oil topped US$100 per barrel, the once cash-strapped airline industry is now reaping record profits. (AFP/Spencer Platt)

NEW YORK: Plummeting oil prices have led to falling plane ticket prices - and prospects for an even bigger bonanza of consumer-friendly fares in the coming months, airline industry experts say.

With fuel prices down by two-thirds from the dizzying heights of mid-2014, when oil topped US$100 per barrel, the once cash-strapped airline industry is now reaping record profits. Increased competition also have helped coax down once stubbornly high fares, the experts say.

"We've seen typical domestic prices drop about 14 per cent over the past year," Patrick Surry, chief data scientist at Hopper, the airfare prediction app, told AFP. "The drop in fuel prices is a major factor, along with increasing competition from low cost carriers, both domestically and internationally," Surry said.

Experts say fuel makes up about a third of an airline's costs. With oil and jet fuel costs down two-thirds since last year, airlines can expect to reduce their overhead by about 20 per cent.

Some of the best bargains are for air fares to popular US travel destinations like Chicago, New York, Los Angeles, and San Francisco, cities where competition is stiff. Good deals can also be had on routes to the southwestern US energy meccas of Houston and Dallas, where the slowdown in the oil business has led to discounted air fares.

Some companies said they are using the windfall in fuel costs to reduce debt and to make needed reinvestment in their infrastructure. "We are utilising our cash to continue to secure our future," said Gerry Laderman, senior vice president at United Airlines. "In 2015, we prepaid US$1.2 billion of debt, including US$300 million in the fourth quarter."

Likewise, Richard Anderson, CEO at Delta, said of his company: "Our focus on our long-term goals is unwavering. We will continue to reinvest in the business at an appropriate level to sustain long-term growth."

The US Bureau of Labour Statistics in a report earlier this month (January) said air fares by foreign travelers on US airlines fell 15.0 per cent in 2015, the largest calendar-year drop since the index was first published in 1987.

The decline in ticket prices was steepest for air travel to Latin American and Caribbean (down 17.8 per cent), but there were also big drops in fares to Asia (down 14.6 per cent) and Europe (down 11.7 per cent).

CHEAP FARES TO THE OLYMPICS?

Travel industry experts said that the relatively low prices were likely to continue throughout 2016, including an anticipated 23 per cent drop in the price of air fares to Rio this summer, just in time for the Olympic games.

But there will be plenty of bargains for those travelling to other destinations as well, said Scott Kirby, president of American Airlines. "There's lots of low fares in the market," the airline CEO told reporters. "Consumers are having a field day in this environment," he said.

American, which emerged from bankruptcy two years ago, is just one of several major airlines posting record profits over the last few quarters.

POCKETING THE SAVINGS

Not all of airlines' fuel cost savings have gone back into the pockets of passengers, however. "Of course, there's no reason that they have to pass this (the savings) directly to consumers," said Surry.

But even with some companies pocketing or reinvesting a good deal of the savings, they "are definitely trickling down," he said. And the high-flying airline industry is likely to continue passing along a good portion of their saving, experts said.

"So long as we avoid full recession, US airlines are likely to see yet another historic year of profitability in 2016," said David Fintzen, an aviation analyst with Barclays.

The International Air Transport Association, IATA, noted that the picture is not entirely rosy. Some airlines, it said, will not benefit from the full impact of falling fuel prices because of a sharp rise in the value of the US dollar in recent months.

Some airlines have been hurt by hedging policies that led them to lock in future fuel supplies at higher prices.