While there are signs that a U.S.-Iran deal to end the current war may be at hand—which would reopen the Strait of Hormuz, a critical world oil transit spot—that doesn’t mean airfares are likely to fall anytime soon.
After the war began in late February, fuel prices rose dramatically, including jet fuel, which almost doubled in cost. This affected airlines’ bottom lines and changed their behavior.
As a result of the higher jet fuel costs, many domestic carriers raised fares and reduced flights.
Now, even if fuel costs drop, the airlines will still be looking to recover the money they’ve already spent. What’s more, the industry has seen that many travelers are willing to pay higher ticket prices, and there may be pressure to keep ticket prices higher, report some outlets.
“The costs of operations are baked in now for the next three or four months for most airlines, with little room to be able to maneuver,” said John Grant, chief analyst at OAG, an aviation data provider. “It’s not a simple cause-and-effect relationship. Oil coming down by 10 percent doesn’t mean prices come down by 10 percent.”
Airline executives have echoed this sentiment in recent weeks:
“The longer this lasts, the higher the probability goes that the pricing increases hold,” said United CEO Scott Kirby in April.
“[Raising fares seven times is] the most that I could remember in my 38 years in the industry, but with fares up that much, there’s been no drop-off in demand at all,” said Bob Jordan, CEO of Southwest Airlines.
And a return to lower prices wouldn’t happen quickly, even if all the diplomacy works out soon.
The American Petroleum Institute’s website explains one such example, West Coast jet fuel.
“Though only about 8% of U.S. crude oil is sourced from the Middle East ... California and other West Coast states import about 20% of their jet fuel. Most of it comes from South Korea—whose refineries depend on Middle Eastern crude oil. In practice, that means crude oil sails from the Persian Gulf to South Korea, is refined into jet fuel and then sails again across the Pacific to the West Coast,” the trade group said.
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