Is demand taking off?

If you’ve been on an airplane lately, you know how those 17 clowns in a Volkswagen Beetle feel before they jump into the circus ring. What’s most remarkable, however, is the ability of airlines to keep prices at 2014 levels when the price of oil has fallen by more than 50% since then. How do they do that?

The answer: They can do it because people are willing to pay.

unitedThanks to plunging crude oil prices, jet fuel has fallen from $2.46 a gallon a year ago to $1.39 last month, a decline of 43%. (These are wholesale prices). Yet the average domestic air fare has fallen to $388.32 from $382.15 a year ago, a decline of less than 2%, according to the Department of Transportation.

The current price of airline tickets does not seem to reflect big hikes in wages or benefits for pilots or flight attendants. Obviously, there’s more to running an airline than gassing it up and paying employees. Companies need to update their equipment, pay off debt, and overcompensate their executives.

“Until we can adequately reduce debt, return cash to shareholders, renew our fleets, and share profits with employees, there is work left to be done,” Melanie Hinton, spokeswoman for  industry group Airlines for America told National Geographic.

Good to know! Nevertheless, fuel is a big part the price of an airline ticket, and even though some airlines may have hedged away the drop in jet fuel prices, consumers have seen precious little in savings.

And, while consumers gripe — it’s what we do — airports seem no less crowded, and airlines are carrying record numbers of passengers, at least on a seasonally adjusted basis.  And one reason people may be flying more is that they feel a bit more comfortable spending money to travel.

After all, the Conference Board’s Employment Trends Index showed “solid and broad-based gains, with no significant slowdown in job growth expected through the first quarter of 2016,” according to the press release. When you feel reasonably confident you’ll have a job, you feel a little bit better about getting gouged for an airline ticket.

According to the University of Michigan’s Consumer Confidence survey, consumers do indeed feel fairly good about the prospects for jobs and the economy. “Consumers anticipated somewhat larger income increases during the year ahead as well as expected a somewhat lower inflation rate,” the November release said. “This meant that consumers held the most favorable inflation-adjusted income expectations since 2007.”

The good news, then, is that while airfare wars may not be in the cards, a reasonably good economy could be. If that’s the case, airlines are just one potential beneficiary of massive pent-up consumer demand. Americans have been wary of spending since the economy imploded in 2008. That usually doesn’t last long, and when American consumers open their wallets, the economy could get a significant surge.

 

One thought on “Is demand taking off?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s