Will falling fuel costs result in lower airfares? Is it too early to book holiday trips?
Earlier this month I had a meeting with the scientists behind the new airfare prediction website FLYR, at their headquarters in downtown San Francisco. After that meeting I came up with some fare-related questions that TravelSkills readers might like to ask these smart guys.
Today, I’ve asked them to examine what impact lower fuel costs might have on airfares later this year… and into the holidays.
Q: Will airlines lower fares at the last minute for travel to Europe this summer due to sharply lower fuel costs? Will decreased demand from Europeans due to weak currency situation bring prices down compared to last year?
FLYR: In general, we do not recommend waiting until the last minute for any airfares unless it is absolutely necessary (see previous post to learn why). Regarding fuel costs and currencies, these are issues that we at FLYR recently examined, due to the immense public interest in the recent plunge in crude oil prices.
We observed that over the rise and fall of jet fuel prices in the past two decades, airfares are remarkably stable in comparison. Part of this lies in the relative elasticity of demand between the two products. See the charts above (and below) which compare what we pay in fares to what airlines pay for fuel. Note how inflation adjusted airfares have remained nearly flat over the last 20 years, while fuel prices have jumped around wildly.
Another reason fares are not heavily affected by fuel prices is the use of fuel price hedging by airlines (the extent of the practice varies by carrier). When fuel prices are hedged in monthly, quarterly, or semi-annual contracts, airlines get a better sense as to what operational costs look like in the near future. Likewise, these hedges act as a buffer against sudden changes in spot prices.
The quarter-on-quarter changes since 2007 represent some of the most volatile periods for energy prices in recent history. Even so, you can see a counter-cyclical-like movement trend between fuel prices and airfares. It’s not really a counter-cyclical relationship of course; rather, it’s a one or two quarter lag before any drastic changes show up in airfare pricing.
Similar to commodities hedging, currency fluctuations are also hedged by a number of carriers with global reach. Therefore, we expect that a large part of the recent currency swings will be absorbed at the carrier level. Any effects felt at the consumer level (if at all) would take time to hit.
Q: For Holiday season travel, I need to travel on peak days around Xmas….should I book my ticket home for the holidays NOW or should I wait?
FLYR: There’s definitely a feeling of dread when it comes to booking holiday travel — not least due to the skyrocketing fares on certain peak days. That said, we found that the trajectory of holiday vs. non-holiday airfares is actually very similar. So what accounts for the extra cost of airfares?
There are two primary factors at work. First, certain discount fare classes are completely removed from holiday inventory, so needless to say holiday travelers shouldn’t count on snagging a “killer deal” during peak travel dates.
Second, travelers tend to book a few extra weeks in advance due to the relative importance of holiday travel and the fear factor associated with expensive holiday airfares (talk about a self-fulfilling prophecy!). Our advice? Expect to pay more – not because you necessarily missed a lower fare, but because there were fewer lower fares to begin with. Book your holiday trips a few weeks earlier than you normally would, but certainly no need to book (or stress about the holidays) nine months in advance.
See previous post about predicting spring-summer airfares
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