"Such fare hikes indicate that airlines don’t plan to pass on the savings on jet fuel from recent oil price drops, Rick Seaney, CEO of travel search site FareCompare.com, wrote. Fuel is the largest expense most airlines face, and oil prices have decreased by as much as 25 percent since early summer."As I show below, lower costs for firms but not a lower price for the buyers is a possibility in oligopoly. See also Airlines Profits Soaring.
We recently covered market structure in my microeconomics class. Usually four market structures are covered: perfect competition, monopoly, oligopoly, and monopolistic competition. Oligopoly is an industry with a relatively small number of firms which is not easy to break into. The auto industry is often given as an example.
One theory of oligopoly is that each firm (an oligopolist) might face a "kinked demand" curve. All firms choose Q so that MR = MC. Once Q is found that allows us to get the price. But if MC falls (due to things like lower fuel costs) and we stay in the gap in MR, Q does not change and neither does price.
I show later that even a monopoly will lower their price when costs fall.
It is possible that the airline industry is competitive (it is unconcentrated according to Justice Department merger guidelines as I show below). In that case, we might just be seeing an increase in demand outweigh the increase in supply caused by the lower fuel costs, as in the next graph
The Justice Department takes the market share of all firms in an industry, squares them and then adds them up. Here is the airline industry
The 1278.6 is the Herfindahl-Hirschman Index (“HHI”) of market concentration. Now there is still 14.6% of the market going to other firms but they will all be very small. Since HHI is less than 1500, the Justice Department considers the airline industry an "Unconcentrated Market." See Horizontal Merger Guidelines. Mergers are not usually a concern. So maybe it is not an oligopoly. I am not sure.
Here is that monopoly graph mentioned earlier. Price falls with lower costs.