In the 21st century, airline fuel costs have ranged from 68 cents to $3.69 per gallon. Higher fuel prices eat into airline profit margins, not just because of the absolute price increase but also the rate of the increase. A gradual increase gives the airlines time to adjust. A sudden, sharp spike is harder to deal with.
One reason it's difficult for airlines to adjust to sudden increases is that carriers plan flight schedules a year in advance. An unanticipated rise in fuel prices can turn a profitable route into a money loser. Increasing fares and charging higher costs for checked baggage are among the ways airlines deal with the cost, but this can backfire on profits if passengers decide ticket prices are too high for optional travel. Airlines can also adjust by cutting labor costs to the bone. In the long run, airlines look at increasing fuel efficiency so their fuel needs decrease.
Fuel Price Effects:
The drastic increase in oil prices in the early to mid-2000s devastated airline profits. To generate extra revenue, airlines developed fees for previously free items such as checked bags, blankets and food.
Reduced Flight Schedules
Rising fuel prices caused airlines to decrease the number of flights on its schedules to conserve fuel and raise the "load factor," or the number of paying passengers per available seat.
Higher Ticket Prices
An increase in fuel prices causes an airline's operating costs to skyrocket. To compensate, airlines raise ticket prices to generate more revenue.
Despite the reduction in costs by scaling back flights and the revenue generated by increasing prices and fees, airlines still saw record losses during the early to mid-2000s as a result of rising fuel prices.
Effects of Lower Fuel Prices
Fuel prices have dropped dramatically as a result of the global recession of the late 2000s and early 2010s. Despite the recession, many airlines have returned to profitability, in large part due to cheaper fuel prices. Despite the decrease in fuel costs, airlines have maintained their fees on previously free items and reduced flight schedules.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.