Be prepared to pay more for airfares than you did in 2010.
As the airline industry stays its course through a delicate and fragile recovery period, escalating oil prices are forcing carriers to increase their airfares. Fuel costs represent the key component to an airline’s cost structure, so when the price of oil spikes — and it currently hovers over the $100 a barrel mark for the first time since 2008 — carriers have little choice but to elevate the price of airfares. And just when things were going so well. (Well, as good as they can get when it comes to the airline industry.)
The Great Recession came very close to making most carriers extinct. We all remember when oil prices reached their highest apex in history in 2008 ($145 per barrel). Unemployment was up, consumer confidence was scarce, and if that wasn’t enough to contend with, the industry had to go toe-to-toe with something called Eyjafjallajökull.
But airlines endured. And they did this the way most businesses do: they merged with other companies, drastically reduced their cost structure, and found new ways to make money. These days, passengers don’t feel strange forking over additional cash for checked bags, pet transportation, extra pillows and blankets, and my personal favorite: the “No Adam Sandler On-Flight Movie” fee. (I made this last one up. Sorry, Sandler fans. Sort of.)
Now, with the price of oil skyrocketing, it feels like 2008 all over again. Airlines have already increased their fares four times this year, compared to three times in total last year. Adding to this, some carriers are bumping up their fees. US Airways recently increased its over-sized bag fee to as much as $175 a bag — up from $100. Need to check a third bag? You’ll have to pay $125 instead of the $100 you previously paid.
Unlike 2008, however, passengers seem to be paying. Last year the industry mercifully enjoyed a healthy increase in leisure and business travellers. Since January, the sector has enjoyed 13 consecutive months of revenue growth. For an industry on the brink of total disaster only a short period ago, this is a crucial time. Will the sharp rise in fuel costs threaten to dismantle the industry’s delicate, vulnerable period of stabilization?
So far it hasn’t. Right now airlines are increasing their fares because they believe they can. The demand is there. People want to fly and have the extra money to pay the higher airfare. But if drastic reductions in passenger demand occur throughout the year, you might see airline executives shuddering at the thought of another 2008/2009 industry-wide nightmare.
And that might be more than the industry can bear.
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