Jet Fuel Prices Drop, But Will Airfares Follow? Experts Say Not Soon

The global jet fuel price has dropped after the US and Iran signed a preliminary ceasefire deal, which has many hoping that airfares will drop too.

Airlines raised prices for flights in response to higher fuel costs, but experts say there will be a lag before airfares come back down if demand does not ease.

Will flights get cheaper?

Probably not any time soon, says Justin Brownjohn, the senior manager at the Royal Melbourne Institute of Technology's Aviation Academy.

"Like home loans, banks are quick to increase rates, but a bit slower to decrease them," he says.

"Airlines' costs increased substantially and swiftly, so there were immediate impacts to their profitability, so fares will remain slightly elevated while airlines recoup some of that hit."

Prolonged lower fuel prices would certainly help lower airfares, but that's not the whole picture, according to Adelaide Univewsity aviation professor Shane Zhang.

"Airfare reductions are more likely when combined with stronger competition, increased seat capacity, improved aircraft efficiency, and weaker passenger demand," he said.

"Most studies suggest that competitive market conditions are often more important than fuel prices alone in driving fare reductions."

How much have jet fuel prices dropped by?

The global price of jet fuel dropped by 14.2 per cent in the week ending June 19, according to the International Air Transport Association's (IATA) jet fuel price monitor shows.

One price index, the global weekly average price, is now sitting at $US 119.17 per barrel.

That's 24.4 per cent lower than last month's average.

But fuel is still expensive

Even after the recent drops, IATA's global fuel price index showed the global fuel price was still 32.4 per cent higher than it was this time last year.

Unless jet fuel prices fall back toward January levels, airlines are likely to keep fares higher, Goodbody Stockbrokers head of aviation and travel research Dudley Shanley told Reuters.

He said they might even push fares higher if demand allows.

Fare increases may not cover fuel price impact

April forecasts from the Qantas Group estimated as much as $800 million in extra fuel costs for the period between January and June, which the airline said was increasing ticket prices.

A day later, Virgin Australia forecast an extra $30 to 40 million in fuel costs for the period between January and June.

"Airlines are generally able to pass through only part of fuel cost increases to passengers," said Dr Zhang.

"This means fare increases often do not fully compensate for rising fuel costs."

How much did fares go up by?

That's hard to say.

Virgin increased its domestic fares by about 5 per cent since March, according to a domestic airline report from the Australian Competition and Consumer Commission (ACCC) earlier this month.

Meanwhile, the Qantas Group has not disclosed its fare increases, the ACCC says.

The ACCC's report included data on fares for flights in May but those flights were booked in March – an important caveat given the war began on February 28.

Its data also looked at how much revenue airlines made per passenger, but said it was also skewed by people booking tickets well in advance.

Airlines didn't just raise fares

Raising ticket prices isn't the only way airlines recoup losses from higher fuel prices. They can also tweak how the operate.

This can include:

Cutting flight frequencies

Operating smaller aircraft

Temporarily suspending unprofitable routes

Grounding aircraft to reduce fuel consumption

"These measures are collectively referred to as capacity adjustments, which generally reduce the number of available seats in the market," Dr Zhang said.

This can help to maintain customer demand, even as prices sting a little.

"Capacity is supply, so where that is reduced, even if overall demand remains stable, that demand is vying for fewer seats, which will ultimately raise fares," Mr Brownjohn said.

The Qantas Group and Virgin flagged changes to their capacity in their market updates back in April.

We can only guess at what the airlines' strategies will be in the coming months, but experts aren't expecting immediate changes.

"Airlines will make best use of the lower fuel prices and maintain strong focus of capacity discipline," Mr Brownohn said.

"If fares can remain high in the immediate short-term, this allows the airline to recover at least some of the additional fuel costs they have endured of late."

When will flights get cheaper?

Probably not until demand drops — that is, when more people stop buying tickets at higher prices.

And expect to see a drop in the price of overseas flights before most domestic fares.

"International fares are more competitive than domestic fares so we will see faster moderation of fares in those markets," Mr Brownjohn says.

"But unfortunately, that is not where the primary profit driver is for Australian airlines.

"In the face of an immediate decrease in fuel prices, for example, domestic fares will likely only reduce off the back of reduced demand.

"Once the airline starts struggling to fill those domestic seats at the higher fares, that's where we will start to see more wholesale reduction is pricing."