Airlines Warning Higher Fares on the Way with Fuel Prices Rising

Jet fuel has risen in cost by as much as 50% over the last year and airlines top executives have started to warn they might need to increase ticket prices as well as cut capacity if the cost of fuel continues to rise.

Earlier this week, Delta Air Lines was the latest air carrier to lower its forecast for profit due to the sharp increase in fuel costs. American Airlines took that step more than a month ago, when estimating that the higher cost of fuel would represent a hit of $2 billion in 2018.

As the summer traveling season begins many seats have already been reserved and airlines have said that they will not act immediately. Delta told its investors this week that it plans to make a decision in July for its fall capacity, when demand usually falls.

An expanding economy and more reliance on fees, which are charged now from premium economy seats to baggage, have allowed for strong profits for several years for the airlines, and they expect this year to remain profitable. However, the levels of profit the airlines were anticipating will not be reached, said the International Air Transport Association managing director Alexandre de Juniac.

With more efficient, newer planes, fuel now represents between 17% and 22% of the operating costs for airlines, down substantially from the last time the cost of fuel spiked, said a consultant in the industry.

Brent crude, the benchmark worldwide closed at over $75 per barrel earlier this week which is about $20 higher than a year ago. The Organization of Petroleum Exporting Countries in two weeks will discuss if they will relax their production limits on oil that have helped to increase prices.

When the price of oil reached record highs over a decade ago, airlines increased the prices of tickets by adding fuel surcharges to them. When the price of oil dropped a couple of years later, the extra charges did not disappear quickly, as air carriers opted to use the extra revenue to reinvest in the company, pay out dividends to their shareholders and increase employee pay.

Recently, the economic environment has been positive and led to airlines adding flights thanks to strong sales for tickets.

Eventually, high prices of fuel could chop off the newly added airline routes said one industry consultant.