Oil prices are rising amid global conflict, but will airfares increase too? Here’s how airline pricing works—and why demand, not just fuel costs, drives ticket prices.
The timeline cost of a barrel of oil looks like a game of Pong these days. Around $70 before the Iran conflict began, the price has seesawed up to $120 and down to $90 over the past week. In either case, the price of oil is higher, which drives the price of jet fuel higher, and jet fuel is the airlines’ largest expense after labor.
American carriers have not yet announced an across-the-board fare increase, but it’s also worth noting that airlines are more surgical about pricing than they used to be. With sophisticated inventory management systems, they can limit the availability of lower fares on each flight without cancelling or raising the fares outright. The result is more onboard revenue, without any apparent change in fares (tracking the fare on a single flight using a service like Google Flights isn’t the most accurate barometer of industry-wide trends).
Related: Airline Raised Flight Price From $4,000 to $28,000, as War Hits Travel Budgets
How Airline Pricing Works
Airline pricing is also speculative, meaning airlines are selling seats before they know how much it will cost them to fly, so airlines are always selling their inventory with the same objective: to maximize the revenue onboard the aircraft—regardless of costs. But airline seats are a limited commodity with a set expiration date. Once an aircraft departs, the opportunity for unsold seats is gone forever. Because of this, the major driver in airline pricing is demand, both currently and for the period remaining before the flight departs.
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Because of this, demand rather than cost drives how airlines price flights, but it’s also worth noting that the closure of Middle East airspace has knock-on effects around the world. Some airlines, including Qantas and Air New Zealand, have announced price hikes, but the effects on seat availability are the real issue.
With large global hubs in Dubai and Qatar largely offline for the time being (only a limited number of repatriation flights are being offered), passengers traveling on a number of international channels are now looking for alternatives. Passengers traveling between Europe and Australia or New Zealand, for example, have long connected in Qatar or Dubai. The closure of those two hubs is forcing passengers on that channel to look elsewhere, including flights via the United States. That means fewer seats for sale on flights outside the Middle East, including flights between Oceania and the U.S., and onward from the U.S. to Europe. That means fewer seats for sale on those flights, which helps drive fares higher, even though both flights are nowhere near the conflict zone.
Airlines can also increase revenues without increasing fares. Airlines that charge for seat assignments often don’t have set amounts they charge for seats (the fee changes based on demand; a practice called “dynamic pricing”) so they can also sneak price increases in there. Airlines can also slightly boost first and business class fares, which are already higher (and their buyers are less price-sensitive) so minor increases are less conspicuous.
But all that assumes demand for air travel remains healthy. If flyers stop flying, the situation changes. During the pandemic, there were two schools of thought among airlines: some chose to keep fares lower, hoping they could stimulate some demand with an attractive price point, while other airlines assumed demand was more fixed, and that the remaining pool of buyers needed to go, and would pay more—and feel safer on an emptier aircraft.
Should You Book Now or Hope for Prices to Come Down?
Travelers unsure about whether to book now to lock in existing fares or wait to see if fares drop don’t have much to go on beyond blind luck. The unknown x-factor is how long the conflict will drag out, and whether the markets’ current concerns about the availability of crude oil will ultimately restrict supply enough to create a lasting price increase in fuel costs.
Flyers buying basic economy fares are locked in—they can’t change their tickets, not even to take advantage of a fare drop (although federal law requires airlines to fully refund ticket purchases regardless of fare type within 24 hours of purchase, with some exceptions). Nonrefundable discounted tickets that are not basic economy tickets can generally be cancelled or exchanged for credit if the traveler elects not to fly on the original dates, or if the fare goes down after purchase. And, of course, refundable fares provide refunds for passengers who cancel or rebook at a lower fare.
Rules vary by airline (airlines outside the U.S. are less likely to offer credits if fares go down after purchase), so be sure to read the fine print before buying the ticket.
