Will Airfares Drop With Oil Prices?

Aug. 6, 2008 — -- With apologies -- and thanks -- to the Grateful Dead, I've got to say it's been a really long, strange trip aboard the airlines this year.

It's been a real wild ride, thanks to real wild oil prices. Let me get specific: in one very short, tumultuous year, air travel has marched headlong into a new era of a la carte pricing. Today, an airline ticket is little more than an expensive, one-time pass to get on and off an airplane. True, that ticket comes with a guarantee of basic safety and hygiene services (no pay toilets yet!), but beyond that … anything extra is going to ring the airline cash registers.

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You know that US Airways now charges for a can of Coke -- and even water. But did you know that JetBlue now charges $7 for a blanket and pillow?

As I said, the catalyst for U.S. aviation being turned upside down sits squarely on the shoulders of the unprecedented rise in the cost of fuel. Many of us have watched -- in horror -- as the price of oil sailed from $70 to more than $140 a barrel in a single year.

But recently, the price of oil slid below $120 a barrel. That's a drop of almost 20 percent, and the drop has occurred in the past three weeks alone. Why? Who knows? Maybe T. Boone Pickens has scared off speculators with threats of billion-dollar wind farms; or maybe it's been all those politicos wrangling over energy as they seek to grab the moral high ground; or maybe it's that we really have started to change our energy consumption habits. No matter, it seems more and more likely each day that we could see oil drop below $100 a barrel -- more likely, certainly, than oil hitting $200 this fall, as was predicted by a number of analysts.

That leaves us with two very big questions: now that prices are coming down, what are the airlines going to do about their current and (relatively) high ticket prices, and what are they going to do with that boatload of new and increased "revenue-enhancing" fees?

First, stay calm: let's not get irrationally exuberant about the prospect of ticket and fee rollbacks based on current drop in the price of oil, a smidge over $120 a barrel. As Gary Kelly, the CEO of fuel hedge king Southwest, stated bluntly, "No airline can make money at $123 a barrel of oil."

Understand that airlines have not been sitting idly by this past year, waiting for the worst as, one-by-one, the weakest among them have been slowly tossed overboard. No -- the airlines have been busy. In fact, they've been surprisingly proactive in preparing for the possibility of prolonged oil price shock. For proof, just look at the 30 attempted system-wide airfare hikes over the past year, or look at the merger-mania and the alliance activity, or the accelerated retirement of fuel-guzzling planes, plus all those nickel-and-dime fees, the layoffs and the drastic capacity cuts that have brought us back to 1998 levels of available seats.

So, if the price of oil rolls back to maybe what it was first thing this year, will the airlines rollback all those price hikes and fees?

In a word, no.

So, what is the magic price of oil? What is the number that will make airlines start acting like their former selves?

First of all, I don't think airlines want to be like "their former selves." A slow sea change was already happening even before the fuel run-up, and that suddenly kicked up to warp speed. It is apparent to me that legacy airlines would actually like to be a mixture of 2006 and 2008 models.

By that, I mean airlines were eeking out a modest profit at $70 a barrel of oil last spring. If we take into account those nasty "revenue-enhancing" fees, the slashing of operating expenses and what looks like full planes for the foreseeable future, designed to keep ticket prices high, we can assume airlines have set themselves up to be profitable at around $80 to $90 a barrel.

So, our magic number is still $30 to $40 away.

And who knows, maybe we'll reach the "magic number" in another three weeks. Or maybe the price of oil will swing back to $150 a barrel in short order. There is one thing for sure, though: if oil drops, the airlines won't want to rollback their prices and fees.

But all it takes is one airline willing to do that, and trust me, all the rest will follow -- they always do. Airlines are pack animals, and they always take that trip together, no matter how long or strange it is.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Rick Seaney is one of the country's leading experts on airfare, giving interviews and analysis to news organizations, including ABC News, The New York Times, The Wall Street Journal, Reuters, The Associated Press and Bloomberg. His Web site FareCompare.com offers consumers free, new-generation software, combined with expert insider tips to find the best airline ticket deal.