When do lower fuel prices = lower ticket prices?

[A321]

Airlines are quick to increase airfares when fuel prices increase, however, have airlines ever offered fuel rebates to passengers when fuel prices fall? The CEO of Delta, Richard Anderson recently interviewed by Charlie Rose was asked if Delta planned any fare reductions to reflect fuel prices. Delta's CEO whose company bought their own oil refinery and tanker offered that air travel is "still an incredible bargain".

I'm not sure what our Canadian Airline CEOs are thinking when it comes to reduced airfares to reflect lower fuel prices but my Feb 2015 trip to Hawaii will most likely be on Delta as Air Canada Rouge pricing is just too expensive...

[dukepoint]

Large airlines don't buy fuel at a pump like we do for our cars. It's significantly more complicated than that. When oil was near $150 a barrel, gas was around $1.45-$1.60 at the pumps. With oil hovering around the $65 a barrel mark, where is the price of car gasoline? $1.00 to $1.20 a liter. Av Gas has dropped a similar amount...not significant, and certianly not linear.

With our resource based Canadian dollar dropping like a rock, aircraft aquisition prices in US dollars skyrocket, as do US Nav fees, US aircraft handling, US airline employee costs, among many others. This is offset somewhat by lower fuel prices for a relatively small "portion" of unhedged fuel. Most fuel is purchased (hedged) months or even years in advance at fixed prices, to allow "cost certianty" moving forward. Without this, an airline would be subject to the "fuel futures" traders who can jack prices through the roof almost overnight. Airlines would go broke, almost immediately. Hedging is a necessity, unless the CEO's are prude gamblers, and like to roll the dice with shareholders money and peoples jobs. Basically....the fuel going in the tanks on the Canada-to-Hawaii portion of your trip in Feb 2015 was likely purchased somewhere around October 2013.

Don't expect any savings on airfares due to lower Jet A prices, mostly because the drop in price of Jet A isn't as significant as you think anyway, plus the added cost of doing business in other areas that cost in US$....like putting 75,000 liters in your 767 in Hawaii when the airline you're flying with is paying for that gas with an 85 cent dollar. Trust me when say Hawaiian fuel isn't cheep to begin with, then add in a lousy Canadian dollar.

Air Canada, Westjet, Sunwing and Transat are all buying new, or replacing older aircraft....all in US$(like billions of...), and it's costing more every dollar a barrel of oil slides (because, like I stated, the Canadian dollar rides commodity prices...like oil).

It matters not to me as Rouge is hammered everywhere, but when you take your dollars south of the border (remember it's only worth 85 cents), it only makes matters worse for your fellow Canadians. I buy Canadian whenever I can, and try to avoid Walmart (shipping my $$ straight to China) altogether....but thats just me. But if you can't buy Canadian....buy American!


PS. Even with Delta owning their own refinery and not passing on any fare reductions......they're essentially telling everyone that "flying is a bargain, was a bargain, and still will be a bargain" so don't complain. He's right.

If you can get a lower fare on Delta, it's because they still have cheep seats available, while other airlines are sold out.

DP.

[photofly]

Most fuel is purchased (hedged) months or even years in advance at fixed prices, to allow "cost certianty" moving forward. Without this, an airline would be subject to the "fuel futures" traders who can jack prices through the roof almost overnight. Airlines would go broke, almost immediately. Hedging is a necessity, unless the CEO's are prude gamblers, and like to roll the dice with shareholders money and peoples jobs.

I'm so sorry that a smart person like you has bought into the "traders are evil people who unilaterally jack prices" bs. Nobody can "jack" prices unless there are customers prepared to pay the higher price. You can't set a price without both a willing buyer and a willing seller.

It's the very existence of futures traders that allows airlines to fix their forward price of fuel. Both sides of every such deal is a bet: if I buy a million gallons January 1 2016 at $5 per gallon, someone else has to take the risk that the price of fuel will be higher on that date, and carry the loss. It's lucky for the airline there's a trader prepared to do that, isn't it?

If you think that airlines aren't into gambling - consider that my contract for January 1 2016 at $5 per gallon is simply and precisely a bet that the price will be higher that $5 on that date. If the market price is $6, the airline won exactly $1m, and if the market price is $4.50, the airline lost exactly $500k.

[airspeed250]

With our resource based Canadian dollar dropping like a rock, aircraft aquisition prices in US dollars skyrocket, as do US Nav fees, US aircraft handling, US airline employee costs, among many others. This is offset somewhat by lower fuel prices for a relatively small "portion" of unhedged fuel. Most fuel is purchased (hedged) months or even years in advance at fixed prices, to allow "cost certianty" moving forward. Without this, an airline would be subject to the "fuel futures" traders who can jack prices through the roof almost overnight. Airlines would go broke, almost immediately. Hedging is a necessity, unless the CEO's are prude gamblers, and like to roll the dice with shareholders money and peoples jobs. Basically....the fuel going in the tanks on the Canada-to-Hawaii portion of your trip in Feb 2015 was likely purchased somewhere around October 2013.

DP.

From what I have read in the latest annual reports, AC and WJ do not hedge their fuel.

[A321]

I believe the equation that applies as fuel prices drop is:
Lower fuel prices + unchanged airline ticket prices = An Airline's opportunity to MAXIMIZE profits.

[dukepoint]

Most fuel is purchased (hedged) months or even years in advance at fixed prices, to allow "cost certianty" moving forward. Without this, an airline would be subject to the "fuel futures" traders who can jack prices through the roof almost overnight. Airlines would go broke, almost immediately. Hedging is a necessity, unless the CEO's are prude gamblers, and like to roll the dice with shareholders money and peoples jobs.

I'm so sorry that a smart person like you has bought into the "traders are evil people who unilaterally jack prices" bs. Nobody can "jack" prices unless there are customers prepared to pay the higher price. You can't set a price without both a willing buyer and a willing seller.

It's the very existence of futures traders that allows airlines to fix their forward price of fuel. Both sides of every such deal is a bet: if I buy a million gallons January 1 2016 at $5 per gallon, someone else has to take the risk that the price of fuel will be higher on that date, and carry the loss. It's lucky for the airline there's a trader prepared to do that, isn't it?

If you think that airlines aren't into gambling - consider that my contract for January 1 2016 at $5 per gallon is simply and precisely a bet that the price will be higher that $5 on that date. If the market price is $6, the airline won exactly $1m, and if the market price is $4.50, the airline lost exactly $500k.

Sounds like you have an inside track. Perhaps you could provide some insight as to why fuel prices don't more closely parallel the cost of crude. Why are we paying $1.15 (on the Island) for a liter of fuel when a barrel of oil is hovering around $60? Yes, I understand the fabulous BC, eco-concious, "carbon WTF tax" is part of it.

What role do Futures Traders play with regard to fuel pump prices. I'd like to know exactly why we should all be thanking them.

Cheers, DP.

[dukepoint]

FWIW, I think A321 nailed it. You ain't seeing squat.......if un-hedged, its time to make a few bucks.

DP.

[photofly]

I take it you mean mogas...

The price here in Toronto has dropped pretty smartly with the price of crude: down from a summer peak of $1.39 to about $1.07 at present. The cost of the raw crude is only a part of the cost the vendor needs to recover: refining and transportation costs aren't going to change even if the barrel price for crude drops to $10, so movement in the pump price is always smaller than the relative movement of the crude price.

If you're looking for the "evil" people, you could turn your guns on OPEC: cartels are bad for consumers.

[Joe Blow Schmo]

A321: The only thing that would likely drop, if anything, is the fuel surcharge, not the actual ticket price.

dukepoint: I read somewhere that the price of the oil makes up about 30% of the cost of gasoline. The rest being refining costs, transportation, taxes, etc... So if the price of oil drops 50% you would only expect to see a 15% drop at the pump, maybe a little more.

[cjet]

At Westjet I've noticed that as the price of fuel drops we start to fly faster. This burns more fuel but also saves cost on airtime related expenses. So lower fuel cost doesn't always translate into lower ticket prices. There are a lot of variables.


Cjet

[FL020]

If the previous post is actually true, I'll eat my f.....in shorts.

[True North]

If the previous post is actually true, I'll eat my f.....in shorts.

Start chewing. It's called Cost Index. Most airlines do it.

[white_knuckle_flyer]

I guess I'll trust the math skills of the corporate bean counters, but if "cost indexing" does actually work, the price at which it becomes a money-saving option must be hard to pin down. I mean, if it saved money to fly faster, then they'd obviously do it all the time. Since they don't appear to do that, it must be a viable option only when gas reaches a certain price point.

Hmmmm....

And yes, any industry that has an associated "fuel surcharge" should eventually drop that charge. That's the risk you take when introducing a surcharge rather than just raising prices ~ it puts you in the awkward position of having to retract the fee once the extra cost if no longer warranted. The big question is, How long is "eventually" ? I guess it should equal the length of time that the airlines eat higher fuel prices before introducing the surcharge.

[fish4life]

As far as I understand it the cost index figures out the most efficient speed based on a variety of factors such as airframe cost per hour, Maint cost per hour, crew wage cost per hour, fuel cost as well as if the flight is early or late and the costs associated with that. The formula behind it is obviously more in depth that what I'm saying but people much smarter than I am figure it out probably with PhD's in math.

[Joe Blow Schmo]

At Westjet I've noticed that as the price of fuel drops we start to fly faster. This burns more fuel but also saves cost on airtime related expenses. So lower fuel cost doesn't always translate into lower ticket prices. There are a lot of variables.


Cjet

Yeah, our cost indexes have crept up a little in the last couple of months too.

FL020 I hope you're wearing edible undies!

[complexintentions]

duke point has some interesting, if erroneous, statements about hedging, and risk, and traders. So much effort expended to try and convince that he knows what he's talking about, and yet again...

1. Not all airlines hedge fuel. In fact it's far less prevalent now than in the past. The statement that "Airlines would go broke, almost immediately", if they didn't hedge, is hilariously wrong. As mentioned, AC and WJ do not currently hedge their fuel.

2. Read photo fly's post again. Hedging does not remove risk, in fact it introduces its own risk. It's essentially just a bet on price direction. In fact, Southwest lost a huge amount of money on their hedging at one point when they locked in their price and the market price dropped like a rock. They guessed wrong and still had to pay their contracted price, which was far higher than the market turned out to be. Yes, they had price stability but it cost them a lot of money.

3. As stated, currencies are also a commodity. And as such, currency hedges are employed by companies as well to provide stability. So the same risk factors there are with fuel hedges are all at play with the USD/CAD, it is not as simplistic as "suddenly everything in USD is way more expensive". The "lousy Canadian dollar" cannot be blamed for everything if you have a half-decent CFO.

4. Photofly is absolutely right about traders. Without anyone willing to make trades, you'd have a similar situation to 2008 where the system locks up due to lack of liquidity. THAT would be a disaster.

(Incidentally I'm loving, praying, hoping for the CAD to keep dropping like a stone...love getting paid in USD! COME ON 80 cents! 70! 60! I may not have to even wait until 50 to retire. )

And it absolutely makes sense for the cost index to be increased if one of the main input costs (fuel) has decreased dramatically. The faster flight time will reduce the fixed hourly costs such as wages and maintenance, not to mention increase productivity of the airframe.

[twinpratts]

If the previous post is actually true, I'll eat my f.....in shorts.

Start chewing. It's called Cost Index. Most airlines do it.

LMAO

[Flying Low]

Lets see...for 2014 so far...

Air Canada's Revenue
Q1 $3,065,000,000
Q2 $3,305,000,000
Q3 $3,798,000,000

Air Canada's Net Income
Q1 -$341,000,000 -11.1% profit on income
Q2 $223,000,000 7% profit on income
Q3 $323,000,000 8.5% profit on income

Over all this year...
Revenue
$10,159,000,000

Net Income
$205,000,000 2% profit on income

According to the financial statement for 2013
Revenue $12,382,000,000
Income $10,000,000 .08% profit on income

Not sure I begrudge the airlines a chance to make money when they can. Air travel is definitely too cheap.

[Donald]

http://globalnews.ca/news/1809152/westj ... or-itself/

“We’re planning on hanging on to as much of the benefit of the fuel-cost decline as possible. We’re not planning massive [airfare] price reductions,” Saretsky said on a conference call.

“As long as the demand environment stays strong, we’re planning on allowing that [extra cash] to move right to our bottom line,” the exec said.

Much like other airlines, fuel represents about a third of WestJet’s operating costs. The drop in jet fuel prices in recent months is providing a financial windfall for WestJet, Air Canada and other North American carriers, experts say.

But so far, there’s little incentive to pass through any of the benefits to flyers, who continue to fly in strong numbers. WestJet flew 1.6 million customers last month, a new high the carrier said, and an increase of two per cent over January 2014.

“This is a supply-and-demand business and we price according to demand. If demand stays robust, we will continue the pricing strategy we’ve had in effect,” Saretsky said.