Jet fuel prices, which had surged because of the Iran war, are falling, but airlines are hesitating to cut fares and are engaged in a wait-and-see contest. If one airline lowers prices, it could spread into price competition across the industry.
On the 18th (local time), the Financial Times (FT) in the United Kingdom said air ticket prices remain high due to fuel surcharges raised after the Iran war broke out. Ben Minicucci, chief executive officer (CEO) of Alaska Airlines, said passengers are paying "10%–20% more than last year."
By contrast, jet fuel prices have fallen sharply from their peak. The benchmark price for jet fuel in Northwest Europe soared to $1,900 per ton (t) after the Iran war broke out in February but is now trading at about $1,300. Brent crude also climbed above $114 per barrel in March and has now fallen below $90.
However, airlines appear intent on maintaining current fare levels as much as possible. Ben Smith, CEO of Air France-KLM, noted that airlines' operating margins are only in the single digits, saying, "Aviation is a low-margin business. If there is an opportunity to hold prices, we want to do our very best to keep them."
Airlines have taken a significant hit as fuel prices, their largest cost item, have surged. They responded by raising fares and cutting costs, but only partially offset the higher fuel bill. European airlines in particular reduced the shock of fuel price volatility to some extent through hedging (risk avoidance), but U.S. airlines that do not hedge fuel costs faced relatively greater difficulties.
As a result, airlines are seen as trying to keep ticket prices high for the time being to recoup losses they have incurred. The FT said, "If one airline cuts prices, others will have to follow to stay competitive," adding, "Airlines hit by high fuel costs are closely watching competitors' moves."
Moreover, aviation industry executives are cutting supply to defend prices after seeing no clear drop in demand even though ticket prices have steadily risen this year. Luis Gallego, CEO of IAG, the parent company of British Airways, said, "Prices are influenced not only by fuel prices but also by supply and demand," adding that the company is reducing capacity this year.
Low-cost carriers (LCCs) are also joining in keeping fares high. Tony Fernandes, CEO of Malaysia's AirAsia, said ticket prices were raised by about one-third, but "the drop in demand was only about 10%, which was very encouraging."
However, because attracting customers is vital, LCCs are also considering fare cuts, unlike full-service carriers (FSCs). CEO Fernandes said it is necessary to keep fares high for the time being to partially recoup losses from the surge in oil prices, but "in the end, we will return to lower fares (at prewar levels)." AirAsia plans to reduce ticket prices to a level 5% higher than before the war.