Federal Investigation of High Airfares Amidst Declining Fuel Prices Called On by Schumer

C harles Schumer — a member of the Senate of the United States representing New York who has been frequently critical of airline fees — is calling for a federal investigation by the Department of Justice and the Department of Transportation pertaining to airlines enjoying record profits amidst dramatically declining prices for fuel, as he believes that those profits should be passed on to consumers through lower airfares in the United States, according to this article posted at his official Internet web site.

Additionally, Schumer also wants to include an examination as to whether recent airline mergers — which resulted in fewer competitors — is “creating even ‘stickier’ high prices” where airfares are supposedly ten percent higher this year than they were five years ago.

With all due respect to Schumer, that was something about which consumers complained a long time ago. Charles Leocha — who is the chairman and founder of Travelers United, the only non-profit, membership organization which represents all travelers — has been warning of that for years, with this article as the latest in a series of how the mergers of airlines have not been in favor of consumers.

According to Schumer, “Fuel prices – which can make up half of an airline’s costs – are lower than they’ve been in decades, And continuing to drop, yet airlines have not sufficiently lowered ticket prices; fuel surcharges & other add-ons remain, and many can no longer be justified by airlines’ profit margins.”

It is apparently not that easy: according to this article written by John Heilprin of the Associated Press, one reason why airlines have this year not cut ticket prices despite the free fall in the price of oil is because carriers are still stuck with contracts for fuel that pre-date the price slump of the past few months. Airlines will most likely see lower fuel costs in approximately six months; and those savings will likely be passed on to consumers — but despite the increase in earnings, many airlines reportedly remain cautious about their finances as profit margins supposedly remain slim.

Try convincing a passenger who pays ancillary fees for products and services not included in the cost of airfare that profit margins for airlines remain slim — especially when those ancillary fees have generated billions of dollars of revenue for the airlines.

Then again, do not expect all of the savings to be passed on to consumers: carriers are forecasting record profits which will grow 26 percent into 2015 and reaching as much as $25 billion thanks to rising demand and the price of crude oil having fallen by 40 percent since June to its current price of approximately $60.00 per barrel; but yet the average ticket price is expected to be reduced by only five percent in 2015 — excluding surcharges and taxes, according to the International Air Transport Association, which represents 240 airlines, or 84 percent of total air traffic…

…so will airfares actually decrease in 2015 — or will they be increasing?

According to this article by Carol Margolis of Pearls of Travel Wisdom, that depends on to whom you listen: in addition to the aforementioned information from the International Air Transport Association, she posted that “This source, citing AmEx Global Business Travel, says prices will rise next year. Expect to pay more for airfare, hotel accommodations, and ground transportation.”

Here are other statements extracted from the aforementioned article by Charles Schumer:

According to the International Air Transport Association, airlines’ collective global net profit in 2014 is expected to be $19.9 billion and in 2015, is expected to be $25.0 billion. In 2013, airline profits were approximately $11 billion. Per passenger, airlines are expected to make a net profit of $7.08 in 2015; this is up from the $6.02 profit per passenger in 2014 and $3.38 profit per passenger in 2013. In addition to record profits, fuel prices are dramatically falling and will continue to drop. Fuel prices are currently about $60/barrel and according to the International Air Transport Association, the average oil price in 2015 is expected to be $85/barrel; in years past, the average oil price has been above $100/barrel. Fuel costs make up nearly half of an airline’s costs and according to the Seattle Times, airlines are paying 7.2 percent a gallon less for fuel than last year.

Schumer today said that in years past, when oil prices increased to over $100 a barrel, some airlines tacked on a fuel charge which was justified by airlines’ limited profits. Oil futures for the American benchmark settled at $60.94 a barrel in New York on Wednesday. Similarly, Schumer today said that with declining fuel costs, airfare prices should be adjusted accordingly. Instead, airfares have increased 10.7 percent over the past five years, after adjusting for inflation, according to an Associated Press analysis of data from the Airlines Reporting Corp., which processes ticket transactions for airlines and more than 9,400 travel agencies, including websites such as Expedia and Orbitz. Schumer said that given the fact that airlines are expected to experience a $25 billion profit margin next year, it is deeply concerning that these surcharges and fees are still being passed onto consumers. According to a Newsday report, travelers flying domestically from Kennedy or LaGuardia airports this year will pay 3% more than last year, with an average of $498.31 round-trip, including taxes and fees paid at time of ticket purchase.

Particularly concerning to Schumer is that “some airlines are still charging fuel surcharges and other add-ons to ticket prices, even in these profitable times, which the airlines have always justified by their thin margins and limited profitability” — yet airlines are quick to increase prices when fuel costs rise.

I find that statement particularly interesting: notwithstanding the recent precipitous fall in fuel prices, I have found in recent years that when the price of crude oil increases, fuel companies usually waste no time in increasing the price of a gallon of gasoline at fuel stations by ten cents per gallon or so; yet when the price of crude oil decreases, the price of a gallon of gasoline at fuel stations usually decrease far more slowly — such as by a penny per gallon every few days or so — if at all. Why not get the Department of Justice of the United States to investigate fuel companies? Are they not usually engaging in similar practices of which Schumer is accusing the airlines?

As I wrote in this article which was posted ten days ago, airlines are not the only companies taking advantage of lower fuel prices. Does singling them out to investigate them make any sense?

Perhaps I am mistaken, but air travel is not like such items as fuel or groceries or utilities where people have more of a “right” — for lack of a better word — to consume their products and services. There was a time where traveling as an airline passenger was a luxury. In fact, there was a time when elite level status was a luxury; and now there are people — such as this pregnant woman — who seemingly want access to it to the point where they mistakenly treat it as though it were a “right.”

Companies in unregulated industries are permitted to exercise the option of passing on cost savings to their customers, rather than be forced to do so by government intervention. As much as I would like to see lower airfares — travel is my passion; and the lower the costs for me, the better — unless they are committing illegal operations in some manner, businesses should generally be allowed to operate on basic economic principles such as supply and demand where the free market determines the price of airfare…

…except that airlines have also experienced government interventions in the past which have artificially affected the economics of commercial air travel — especially during those years when they were performing poorly with their financials. Remember the “bailouts” airlines received from the federal government of the United States when they were on the brink of being permanently grounded financially? Many companies typically cannot run to the federal government for a “bailout” as a “safety net” when times are bad financially.

Does that mean that airlines are fair game for a federal investigation pertaining to their business practices? Should airlines be forced to pass on their savings to the consumer? What are your thoughts?

8 thoughts on “Federal Investigation of High Airfares Amidst Declining Fuel Prices Called On by Schumer”

  1. DaninMCI says:

    Good old Chuck usually doesn’t make sense. It’s a free market system at this point and congress has bigger fish to kill I think. How about price gouging on diesel fuel versus gasoline prices right now at the least.

  2. ken says:

    To me, it seems like a matter of social responsibility of airline companies. Government often saves their a$$ when they cannot survive but there is no rule that says airlines should care about the consumers because in the end, airlines companies are private entities. But I see why it creates a buzz among politicians: consumers see airline companies as a bad guy because of their sophisticated pricing scheme, especially the recent trend of more detailed price discrimination (various fees!) Even worse, the price of oil is going down, so people think airlines are benefiting, in fact they are making positive profits, yet airfare is increasing. Now that LOOKS unfair to customers because these airlines benefited from tax money. Customers get frustrated, thus politicians do more or less illogical thing. To me it seems like the corporate demand for air travel is strong, thus the profit, not really sure if it is about fuel price but most consumers do not see it this way.

  3. Billy says:

    Hmm. Obama justice department allows several mega mergers in the sector and now democrats wonder about sticky high prices?

    Maybe there is a remedial economics class being offered at NYU over the holidays that Chuck could sit in on.

  4. Nick says:

    It takes time for the free market to work. If the profits are that good there should be some new airlines popping up. The government would do better offering incentives to help those along.

  5. Dan says:

    This is a tough issue because with airlines in the USA, and really in many places around the world, there is a question on how free the market is. For one, as is mentioned in the article, the government has given the airlines multiple bailouts over the past 15 years. Also, the big airports in NY and Washington are slot controlled by government agencies. So a new airline can not just come in, pay the market rate for some slots and just start flying to Washington and NYC.

    I dont know what the answer is and I tend to think that airlines have been such a bad investment over the past 50 years that perhaps some good years are needed to increase investment and perhaps the market will provide more available seats. However, calling the airline industry a free market seems like a stretch, at least to me.

  6. antignos says:

    Must have missed that supply and demand curve in the first 15 minutes of econ 101 freshman year. If I remember right it’s 5 minutes after the “No such thing as a free lunch” quote?

    1. mike says:

      or the “all the market will bear” principle

  7. Nick says:

    After some reflection I think a failure of flight prices to drop would be indicative of monopolistic business environment. The government helped create this situation and they should perhaps take a role in fixing it, whether it be reallocating slots or breaking up the mega-airlines.

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