A change of that magnitude greatly improves airlines’ bottom lines: Last year the four biggest U.S. carriers—American, Southwest, Delta, and United—brought in $22 billion in profits.
It’s not surprising that airlines would be slow to forfeit the gains they’ve seen from all those fuel savings, but, curiously, they haven’t been lowering ticket prices very much, which would be a natural way to start trying to steal customers from one another. Even some surcharges that were concocted when times were tighter—charging customers for sitting in aisle or window seats, for instance—still remain in place. Cruelly, even fees that were originally conceived to cover fuel costs have stuck around, even if they now go by different names.
So why isn’t a bigger chunk of these savings being passed onto travelers? This sort of thing isn’t supposed to happen—there’s supposed to be at least one company that’s willing to lower its prices and steal away its competition’s customers.
But that’s not what’s happening. Instead, airlines are spending their money on buying new planes and on moves that please shareholders, such as share buybacks.
“There is not much competition left in the U.S. airline industry,” says Bilotkach. Over the past decade and a half, the industry has witnessed a ton of consolidation (most notably in mergers between Delta and Northwest, United and Continental, and American and U.S. Airways), which means that airlines are less likely to try to undercut one another on price. Yes, it’s true that a low number of carriers doesn’t necessarily imply that there’s a lack of competition—what matters is whether they’re competing on certain routes. But, Bilotkach says, it’s rare for two airlines to compete directly on a nonstop U.S. flight path.
There’s another reason that airlines aren’t competing fiercely on ticket prices: There’s a good deal of overlap in their ownership. For instance, the five biggest American fund managers together own about 17 percent of each American and Delta. As an analysis by José Azar, a senior associate at the consultancy Charles River Associates, found, ownership-overlaps like this cause tickets to be about 10 percent steeper than they would be otherwise.
Could any of this change? The Department of Justice launched an inquiry last summer (before it was clear that the precipitous fall in oil prices would last longer than a few months) into whether American airlines’ pricing decisions qualify as collusion. But to prove anything like that, federal prosecutors would need to find evidence that airlines coordinated with each other—which probably doesn’t exist. More likely, investigators will find a happily uncompetitive industry in which no formal coordination is necessary.
“There is little that the regulators could do, except for waiting for the new entry in response to the profits currently being made in this market,” says Bilotkach. What might help, then, is if U.S.’s airline industry resembled Europe’s more closely. In Europe, low-cost carriers such as Ryanair nip at the heels of large incumbents such as British Airways, making ticket prices more sensitive to major drops in operating costs. There, airlines’ margins are about half what they are in the U.S.
