If The Fuel Price Is Dropping, Why Aren’t Ticket Prices? FAQ Fridays

Video transcription

Welcome to another edition of Travelstart’s FAQ Friday with me, Nick Paul. This week we are attempting to answer the question: “If the fuel price is dropping, why aren’t ticket prices?”

Some background on this topic…

This is a question which many travel agents and travellers alike have been asking recently and for good reason too. The price for oil is now at below $80 per barrel and the price for jet fuel has dropped 20% in the last year yet ticket prices don’t seem to be too different to what they were a year ago. Local travel industry magazine, TNW , published an article about this recently. So here’s a quick summary of what they found.

How is fuel charged to travellers?

Firstly, it is important to clarify that airlines charge travellers for fuel through the use of a fuel surcharge. This is something we covered in a previous video. In short, most airlines charge this and add it in US Dollars to the taxes of a ticket. This is what often makes the taxes of a ticket more expensive than the fare.

What is a fuel surcharge?

The fuel surcharge is not technically the price of the fuel for your seat on your flight. It is more of a hedging fund to help the airline buffer against future steep fuel price increases by gathering the cash in advance to purchase the fuel. Some airlines buy fuel months, even years in advance.

Fuel surcharges from an airline’s perspective

Well imagine you as an airline sell a ticket to a customer when oil is just $80 per barrel. That customer is travelling in 9 months time. 3 months after they purchase the ticket a major war breaks out in the Middle East, cutting oil supply to the rest of the world. By the time they travel, oil is $120 per barrel – that’s a 50% increase in fuel price for the airline and they don’t get that money back. Unfortunately though, for both the customer and the airline, if the airline purchased the fuel before a big drop in price, they can’t get their money back. The airline then continues to sell the tickets at the old higher price to recoup the costs for what they spent on fuel earlier. So in fact, many airlines who bought fuel long in advance would have been caught out and airlines with a less long-term strategy can quickly jump in with lower ticket prices and steal their business.

The bottom line…

If the airline buys the fuel before the price spikes, they win. If they buy it before a drop in price, they lose.

Influence of exchange rates

A final factor in South Africa is the weakening of the Rand against the Dollar and the Dollar’s strengthening against many major currencies the world over in the last year. The Dollar is almost 20% stronger against the Rand than it was a year ago which cancels out the progress made in fuel price decreases almost exactly. Added to this that many services the airlines pay for are in Dollars and it becomes obvious why the costs don’t drop too much.

Positive predictions by IATA

There is good news on the horizon though. IATA, the International Air Transport Association, based on its data and research, predicts that fuel surcharges will begin dropping in the short term. So, with any luck, we will see cheap prices in 2015 – bring it on!

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