What Do Air Fares Have To Do With the Price of Fuel in China?

Over on the Fodors forums LBloom asks a question that I’m sure many travelers have wondered recently:

With gasoline prices below $2.50/gallon in US how come airline ticket prices havent dropped?

It’s a fair question, even if the answer is more than a little bit complicated. Still, Gardyloo offers a valiant and well-explained answer:

Airlines purchase their fuel according to long-term contracts that allow them to hedge against fluctuations in fuel prices. When the price of crude oil drops, the oil companies make high profits from those contracts, and when it rises the oil companies take losses (or, actually, just make lower profits.) The intent of this is to permit the airlines to have predictable costs of doing business. They can then market tickets according to demand rather than bouncing them around based on costs.

To which clevelandbrown adds:

I think their primary way to control fuel prices is to buy options. So if fuel is available today at $100, they buy an option to buy fuel in 90 days at $100. That kind of option is fairly cheap, but gives you control of the amount of fuel specified, in the future. If in 90 days, the cost of fuel is over $100, you win. If in 90 days, the cost of fuel is under $100, you tear up the option and buy at the lower price, again you win. If in 90 days, the cost of fuel is $100, you lose what you paid for the option.

These are the only the highlights of a very interesting and informative thread on the subject of airlines, fuel prices and the factors that go into determining ticket prices. Further, they are yet another example of the fantastically helpful people you will commonly find on travel forums.

Seriously, I have to hand it to the Fodors members. It isn’t difficult to imagine that this same question asked on any of a number of other forums would likely have been met with a barrage of snarky and unhelpful comments. But on Fodors the members stepped up and provided detailed and thoughtful answers that will not only inform LBloom, but many other for months and years to come.

Well done Gardyloo, clevelandbrown and the others who are participating in this discussion. Well done indeed.

Read the thread in its entirety: why hasnt price of airfare dropped?

Gas Price – July 21, 2005” by Philip Shoffner. CC BY 2.0.

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