During the three years to 2017, domestic airfares have been falling at an estimated annualized rate of 2.8%. The primary factor contributing to price declines has been airlines’ falling fuel costs. During the period, the world price of crude oil, which drives the price of aviation fuel, has been plummeting, reducing supplier purchase costs significantly. Airlines have therefore been able to pass some of their cost savings by lowering ticket prices while still maintaining high profit margins, to buyers’ benefit.
Additionally, despite some collaboration and consolidation among major airlines, increasing competition among suppliers, especially from low-cost carriers, has pressured market prices down. Low-cost carriers, which tend to strip flights of amenities in order to offer the lowest possible prices, have been encroaching on the market share of the major legacy airlines, forcing them to price match on many air travel routes. Additionally, many airlines have expanded their domestic travel routes, increasing competition over these routes and preventing airlines from boosting their prices without losing business.
However, the demand for domestic air travel has been increasing overall, limiting the extent to which airlines have reduced their fares. The number of domestic trips by US residents has been increasing quickly, and per capita disposable income has also been rising, giving consumers more money to spend on discretionary purchases, including travel. Although corporate profit has not increased during the past three years, growth in demand for domestic air travel has mitigated the market’s price declines, detracting from buyer power slightly.
Unfortunately for buyers, airfare prices have displayed significant volatility during the past three years, mainly due to fluctuations in fuel costs. High price volatility detracts from buyer power somewhat by making fares harder to budget for. Moreover, airlines’ significant pricing power means that nearly all buyers are subject to the rate changes that airlines impose.
During the three years to 2020, domestic airfares are forecast to rise at an annualized rate of 1.7%. Demand increases, carefully controlled capacity expansion and growth in aviation fuel costs will drive these price hikes.
During the period, demand for travel is expected to increase moderately, which will empower suppliers to raise services prices. Specifically, heightened demand from private consumers will be driven by growth in per capita disposable income. Meanwhile, demand from business travelers will be driven by a return to growth in corporate profit and an increase in the number of domestic flights booked by US residents.
Additionally, trends in supplier input costs are projected to drive prices upward. Aviation fuel prices are anticipated to recover, alongside the price of crude oil. Domestic air travel ticket prices will, therefore, surge so that suppliers can continue to cover their input costs, and some airlines will impose fuel surcharges in order to protect themselves against the input’s extreme volatility.
However, despite the high level of market share concentration, strong competition among airlines will continue to mitigate price growth for high-traffic routes. Budget airlines will continue to keep fares low on the routes they fly, pressuring other suppliers to keep fare growth in check as well.
Fortunately for buyers, price volatility is anticipated to fall during the three years to 2020 as crude oil prices return to growth slowly from their previous years of decline. Low price volatility will benefit buyers significantly by making it easier for buyers to budget for their future travel expenses accurately. Nonetheless, buyers can continue to attempt to mitigate travel costs by flying routes with more competition and purchasing tickets during the optimal time window, which is 29 to 104 days before the flight.