Despite the cost savings to airlines from plummeting oil prices, airfares on the biggest domestic carriers have hardly budged.
Helped by falling oil prices, airlines are reporting record profits, but for many passengers this sudden bonanza has meant little more than extra bags of free peanuts and pretzels.
The four biggest domestic carriers — American Airlines, Southwest Airlines, Delta Air Lines and United Airlines — together earned about $22 billion in profits last year, a stunning turnaround after a decade of losses, bankruptcies and cutbacks. A big reason for this is the plunging price of jet fuel, which costs one-third of what it did two years ago.
That windfall is only slowly finding its way down the aisles. Days after reporting record profits, for instance, two of the nation’s biggest airlines brought back free snacks in coach.
United said it would begin serving complimentary stroopwafels, which it described as “Dutch-made toasted waffle treats,” and American said it would offer free meals in economy class on flights between Dallas and Hawaii, and free snacks on all domestic flights.
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Airfares, however, have remained high.
Rick Seaney, co-founder of FareCompare.com, says airfares have been essentially stable for the past two years except on some routes where airlines have faced competition from low-cost carriers such as Spirit Airlines.
Analysts say there is little mystery why. A decade of consolidation has reduced the number of airlines competing in many markets, making it easier for dominant carriers to charge more.
At Newark Liberty International Airport, for example — where United, which merged with Continental Airlines in 2010, accounts for 70 percent of flights — airfares are the highest among the nation’s top airports, according to government figures.
At the same time, demand is rising, meaning flights are full and airlines have few incentives to discount fares.
“This is like a perfect storm for the airlines right now, and it could keep going on for the next year,” Seaney said. “Giving free peanuts and chips is a way to address the issue that consumers think the airlines have been nickel-and-diming them.”
For now, airline executives have been clear about their priority: Show improvements in financial performance.
This means emphasizing acceptable returns on invested capital by raising dividends, buying back more shares and paying down debt. It does not mean using the savings from fuel costs to finance the type of market-share battle that proved so damaging before the industry began to consolidate.
What managers want to avoid is the kind of price war that devastated the airlines’ economic well-being in the decades after the industry’s deregulation in the late 1970s. While this period of unfettered competition pushed down ticket prices and benefited consumers, it proved unsustainable.
When the Great Recession hit, airline executives reduced the number of flights and successfully argued for the industry to consolidate. Successive mergers between Delta and Northwest Airlines, United and Continental, Southwest and AirTran Airways, and American and US Airways left four big domestic airlines in control of 80 percent of all seat capacity.
“This is a period of good health like we’ve never seen before,” said Ed Bastian, Delta’s president, who will become chief executive in May. “We will want to stay disciplined to make sure we don’t repeat the errors of the past.”
As a result, airlines have placed extraordinary emphasis on what industry insiders call “capacity discipline”: not adding seats faster than demand. The Justice Department, though, is investigating whether this industry practice amounts to possible collusion among the big airlines.
In addition, airlines are finding more creative ways to wring more money from passengers, including charging for aisle and window seats, shrinking legroom to pack in more seats on each plane, and offering priority boarding for a fee.
In a twist baffling to many passengers, the airlines have kept some surcharges that were introduced a few years ago, when oil prices were rising, according to George Hobica, founder of Airfarewatchdog.com. These fuel fees can still be found on many international flights — just under a different name.
“They simply folded them into the fares,” Hobica said. “They call them carrier surcharges and fees. They just don’t call them fuel surcharges.”
Matthew Perosi, a consultant for the jewelry industry, recently paid $942.80 for a flight on Delta from Newark to Amsterdam, then to Bordeaux, France. The base fare was $292, but the final price included a “carrier-imposed surcharge” of $516, he said.
“For the past several years, I’ve just had the genuine feeling that we’re all being overcharged,” Perosi said. “Most of the time, all the extra add-on fees are more expensive than the actual airfare.”
Representatives from the major airlines insist the extra charges are part of the cost of doing business and are not tied just to the cost of fuel.
Gasoline prices and home-heating bills have not fallen as fast as oil prices, but those declines have still been much more substantial than the drop in airfares.
Airlines maintain that consumers are benefiting from their improved financial performance, and that airfares are shrinking, albeit slightly. Average ticket prices fell 3 percent to $385 in the second quarter last year, the most recent period for which figures are available, according to the Department of Transportation. Airlines have reported that the trend has continued.
If there is any crack in the airlines’ fare structure, it is, not surprisingly, in markets where upstart carriers have provided competition.
Low-cost carriers such as Spirit, Frontier Airlines and Allegiant Air have passed the savings from lower fuel prices on to consumers by offering discounted tickets — including $80 round-trip fares on dozens of routes such as Chicago to Atlanta, and Dallas to San Diego — prompting a response from the major airlines.
“The big airlines are sending a message: ‘If you do this to us, we will cause you pain,’ ” Hobica said. “I don’t think American is happy to fly from Dallas to San Francisco for $40 one-way, but it will do it to show it won’t be bullied around by some upstart.”