Each airline’s calculations for setting airfares are a complicated process.
Carriers look at many factors to hit the pricing sweet spot that can appeal to a wide swath of customers while driving major profits. Some, obviously, struggle with their calculations to the point that it helps lead to their demise, like WOW air.
But aviation economists say there are three factors outside of airlines’ control that help determine the cost of your ticket. And fortunately, all three are predicted to hold airfares at relatively low prices in the US for 2019.
“If we look back even to 1975 or 1965, airfares are the lowest they’ve ever been right now,” Alan Bender, airline economist at Embry-Riddle Aeronautical University, told TPG. “From this point on [airfares are] a function of three things: 1. Oil prices 2. Inflation in general 3. The economy. Right now everything is working in the airlines’ favor, inflation is low, the economy is good, and fuel prices are reasonable – those are the three external factors that are the wild card for airlines,” he explained.
If those three factors are held steady, Bender says, the airline is usually efficient enough to be able to hold airfares low for customers. “Nothing goes on forever, something is going to happen, but barring changes then I see things continuing as they are,” which is low ticket prices, Bender said. “2019 projections are inflation is going to remain low, fuel prices will be stable. I foresee 2019 to continue this trend.”
Of course there are many factors within an airline’s control that can affect its ticket prices: whether its aircraft are fuel-efficient, the density of passengers on its flights, overall competition on routes, how it compensates its employees (labor is usually the No. 1 or No. 2 cost at most US airlines; it switches with fuel prices) and how fast carriers can turn planes around for the next flight.
But most US carriers are so good at balancing all of those components, they hardly interfere with how they price flights today.
“The airlines are just so efficient that if external things are under control, the airlines are in good shape,” Bender explained.
And, those factors aside, it can actually be against an airline’s interests to raise fares dramatically, regardless of the economic situation.
“In general fares don’t move dramatically,” Helane Becker, managing director at Cowen Associates, told TPG. “There’s a limit to how high airlines can raise fares because people self-select and opt out if fares get too high,” she said, noting that the average family of four usually has about $4,000 to spend on a vacation, more than half of which can go to airfare.
“This is why basic economy is working, and ultra-low-fare carriers do well for that reason,” she said.
“In general, airlines can’t raise fares willy-nilly. That’s just not how the industry works. We’re seeing good numbers so far this year. Government shutdown aside, most of the airlines are reporting pretty good results (for the) year to date,” Becker said.
Other industry voices agree that fares partly remain low because of the endless onslaught of additional fees some carriers throw at passengers, keeping base fares low and asking flyers to pay for add-ons, like ultra-low-cost-carriers do.
“Airlines have learned to set their ‘decoy’ fares low, to compete with ULCC low fares,” Robert Mann, an independent airline consultant told TPG in an email. “While their online and post-sale merchandising has improved to where they generate an average of an additional $30-plus on top of fares, from ancillary fees, which have little actual ‘service’ cost attached to them and are un-taxed, so, worth far more, dollar-for-dollar, than fares,” he explained.
“That’s a factor, but maybe not the most important factor,” Bender said of ancillary fees. “All you have to do is look at Southwest Airlines. Southwest basically has no fees. There’s no charge to change your flight…they don’t charge for bags. They do charge for preferential boarding. But Southwest is the most successful airline in the US in the last 50 years and they don’t charge fees.”
Featured photo by Peter Bannan / Getty Images.