To date, major U.S. airlines have presented a consistent
response to the question of whether lower fuel prices would mean lower fares:
To put it bluntly, fat chance.
What about corporate air discounts, however? Even if
airfares remain unchanged, might airlines be a little more willing to share
their windfalls with some of their best corporate partners in the form of
deeper discounts? While the answer remains about the same, travel buyers might
have some opportunities for savings in the current fuel economy—particularly
for those buyers who are looking for the more lucrative seats in premium
cabins.
"No airline is going to voluntarily give you a better
deal, but there will be situations where carriers may offer improved discount
terms," said Bob Brindley, vice president and principal of BCD Travel's
Advito consultancy. "If you get a competitive situation, where they're
trying to win additional high-yield business, it gives you more ammunition to
try to get discounts to win that business."
On the other hand, it's feasible that lower fuel prices
could result in even higher airfares.
Much of the outcome will hinge on carriers' capacity
discipline. In recent fourth-quarter earnings conference calls, airline
executives all said they had no plans to adjust capacity in response to lower
fuel costs.
"We will only grow the airline as demand
dictates," United Airlines president and CEO Jeff Smisek said during the
company's earnings call. "The U.S. airline industry has transformed itself
over the last several years through consolidation and matching capacity with
demand, and United will continue its discipline regardless of the price of
oil."
Airline executives also have set plans for the savings they
stand to reap from lower fuel prices this year, namely paying down debt and
investing in fleet improvements.
"All airlines had underinvested through very difficult
times, and we are using the profits we're producing to invest in a product that
matters for our customers, like lie-flat seats, international Wi-Fi and
improving the airport check-in experience," American Airlines CEO Doug
Parker said in his company's earnings call. "Because we're profitable, we
can do it now."
In an interview with Travel Procurement in January, Gail Grimmett, Delta Air Lines senior vice president
in New York, struck a similar tone.
"There's more than one cost that goes into running an
airline, so one cost isn't going to drive decisions across the board," she
said. "You never know what's going to come up in contract negotiations,
but there's a lot that drives the pricing of an airline, whether it's fuel or
pick another element. If you drive pricing off of one element of your cost
structure, somewhere along the line things aren't going to work out for
you."
Carriers with fuel surcharges are facing mounting pressure
to reduce them, but that won't guarantee lower air travel costs. The Qantas
Group, for example, recently announced that it was gradually restructuring its
international tariffs to phase out fuel charges, but those charges would be
absorbed into base fares, keeping the overall cost the same.
Fueling Demand
Meanwhile, it's possible lower fuel costs will boost overall
travel demand, Advito's Brindley said. For families planning leisure travel,
fuel savings could equate to a sudden $2,000 tax cut, he said, and a stimulated
economy would increase both leisure and corporate travel demand. Of course,
lower oil prices also are likely to slow corporate travel from the energy
sector—something United, with a hub in energy industry stronghold Houston,
already has noticed on a small scale—but such a drop likely would not be enough to offset the broader demand increase,
Brindley said.
Should airlines maintain capacity discipline in the face of
higher demand, basic economics put them in the position to increase fares.
What's more, corporate travel buyers appear poised to accept it. A UBS research
note from December, tallying a survey of 60 U.S. corporate travel managers, showed
most would not significantly cut back on travel if faced with a fare increase
of less than 10 percent.
Even so, airlines maintaining capacity discipline is not a
guarantee. As airlines see temptation to grow capacity, the major carriers will
be able to do so fairly easily by delaying retirement of older aircraft as they
bring newer planes in, Brindley said.
"That would open up some lower fare buckets that might
be closed now," he said. "Even without adjusting price levels, that
could cause the average price to come
down."
Airlines also will continue to face consumer pressure to
lower fares to account for lower fuel costs. Seeking Alpha analyst Andrew Hecht
in a January research note predicted an airfare price war ahead as that
pressure becomes insurmountable.
"At the current juncture, each airline has to be
looking over its shoulder, wondering who will be the first to blink,"
Hecht wrote. "It is a sort of a prisoner's dilemma: If they all keep fares
at current levels, they all benefit, but once one lowers them, the others will
be compelled to follow."
Brindley added that airline pricing so far this year
"looks to be a little softer than we originally thought. If anything,
prices are relatively flat." Whichever way things fall, for the present,
Brindley advised buyers to concentrate on markets in which airlines are
aggressively trying to win market share, particularly those with new
competition. Even in those cases, the carriers "are not going to come to
the client and volunteer this," he said.
"If we see any kind of improved discounting, it's not
going to be in the dominant markets, the monopoly market, and not in the
low-fare inventory buckets," Brindley continued. "It's going to be
high-yield, business-class markets that also are highly competitive."
This report originally appeared in the February
2015 edition of Travel Procurement.