Monday, June 11, 2018

It seems like airlines are not passing along all of the increased fuel costs to consumers

See Airlines Raise Ticket Prices as Fuel Costs Surge: Oil is again the largest expense for most airlines prompting higher domestic fares, surcharges on international flights by Doug Cameron and Alison Sider of The WSJ.

An increase in costs is like a new tax. It shifts the supply curve up. But the price goes up by less than the amount of the tax or the increase in costs. There is a link below to a post from a few years ago that explains this with supply and demand curves.

Excerpts from the article:
"Jet-fuel prices have surged more than 50% over the past year, pushing carriers to raise fares and Delta Air Lines to cut its profit expectations.

Delta, the nation’s No. 2 carrier, said Wednesday it could take six to 12 months to recoup the extra fuel costs via pricier tickets."

"“We feel good about our ability to pass through the increase in fuel price,” United Continental Holdings Inc. President Scott Kirby said at an investor event last month. He said strong summer demand is bolstering industry pricing power—with carriers pushing through a succession of small increases of between $2 and $5 per flight on domestic routes—and that will help United recoup about 75% of the higher fuel prices."
Notice he mentions "strong demand." If demand increases, then price will go up. But we have to assume demand is not changing to understand the effect. And also notice he says they will recoup only 75% of the higher fuel prices, not 100%. So they have not been able to pass all of the increase along.

See If You Lower The Excise Tax On A Good By $1.00, Does A Firm Save $1.00 On Each Unit Sold?

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