Why Are Airline Tickets So High?
Flight costs are high for various primary reasons that include the increase in operating costs, fixed costs, vertical integration and reduced number of price competitors, as well as the fundamentals of supply and demand. This is a clear indication that year by year the amount of money required to undertake a flight escalates, despite the fact that inflation is not soaring high.
Operating expenses add up very fast for airlines as they need to cover many essential costs such as fuel, aircraft maintenance and repairs, crew salaries, insurance, etc. This has been a major reason why the price of airline tickets is never coming down as the operating cost for any airline increases year after year. Operating costs include items such as fuel costs, maintenance and wages for flight crews and related services, repair costs, rental for airports or landing fees, as well as costs of systems used in reservation or in other functions. Many of the operating cost are fixed and therefore cannot be drastically reduced during difficult periods, and this puts pressure on the airlines to recover these costs from fare prices.
As for variable expenses, fuel is one of the largest and most unpredictable expenses of operating a business. Gas prices are volatile due to changes in oil prices, conflict in the oil-exporting countries or a natural disaster that may lead to the shutdown of the refineries. Fuel prices are beyond the airline’s control and they are can only adjust instantly to the increased cost by charging their consumers higher ticket prices and other fees. It is noteworthy that ten years ago, fuel costs comprised approximately one-third of the average airline operating cost. It averages over 40% of operating cost today, primarily because of high price of oil, although many airline companies have acquired new fuel-efficient airplane models.
Airlines also reported record levels of spending on labor expense; this, however, does not only apply to the salaries of the crews, as these are expected to rise as well. The problem of pilot and other skilled human resource scarcity has resulted in the airline industry's raising of wages and offering bonuses to pilots. And partly because of the increase in the number of people aged 50 and older, healthcare costs are also constantly rising, which affects labor costs and passes them on to customers. Non-labor operating expenses such as maintenance, technology and repair costs have also been on the increase in the previous years.
When it comes to operating expenses, life always finds ways to surprise you, especially when they are already rising and high to start with. Disasters, diseases, act of terrorism, and wars result to flight delays and closure of airports globally, which puts pressure on the airlines. Other influential factors include global political activities that have an impact on the prices of oil and also the exchange rates of the currencies and insurance costs of the airline.
High fixed costs generate overhead to airlines. In addition to market costs, which include costs of regular business operations, are aerospace fixed costs that must be incurred regardless of how many flights are actually planned or how many seats are filled. Airplanes are a fixed cost in the first place, that is, both the cost of acquiring new aircraft from the manufacturers and the cost of owning existing aircrafts. The vast majority of commercial airplanes come with price tags that range from tens or hundreds of millions of dollars"—investments that may appear on the balance sheet for years before their costs are recovered through ticket sales and cargo transportation.
Airlines also incur rental costs to airport authorities for gates and space, registries and flight certificates, rights, insurance policies and international memberships or alliances. For instance, even when the flights have been called off due to weather conditions or lack of ticket sales, expenses like rental, administrative salaries, and mortgages on equipments are incurred. It is such that it becomes integrated into ticket prices of all operating flights. However, some fixed costs are also exceedingly difficult for the airlines to do anything about, such as taxes, fuel costs or compulsory security charges.
Mergers thus minimize competition and pricing pressures and are therefore encouraged in most business environments. Substantial changes in the US airline industry have occurred in the past two decades, most of which can be observed in terms of mergers and bankruptcies that led to a concentration of the market and a decrease in competitive environments. Today, after those mergers, four large"carriers—"American, Delta, Southwest, and"United"—account for nearly 80% of the domestic carriers. Distributors with fewer numbers of players competing for customers means that there are few incentives to lower or significantly lower ticket prices.
The absence of rivals puts pressure on the large airlines to offer higher fares because there is little to no worry that a competitor will come in and offer a cheaper fare to obtain a larger market share. The fares have been increased in the industry since the mergers and acquisitions. At the same time, other low-cost entrants like Spirit and Frontier have had difficulties challenging and entering the four primary airlines™ large war chests, vast global networks, and the capacity to respond to the prices offered by the new entrants if they become too threatening. Authorities have established very steep legal thresholds for any new entrant into the market, hence no more pressure on the matter of pricing competition.
Majority of the Cases Still Based on Supply and Demand Fundamentals Three major factors constitute the major determinants of the supply chain in the airline industry: operating costs, fixed overhead, and competition; however, basic supply and demand play the most crucial role. Prices are determined by how many tickets can be provided for a particular route or flight as against number of customers who desire to be provided with tickets. Whenever there is increased demand from travelers than the available supply in the market, airlines tend to reap big by increasing the fare charges.
Some routes, such“ as those that many business passengers may take due to their demands for more rigid schedules, exhibit severely inelastic demand and face the highest ticket prices. For instance, a last-minute return ticket from Chicago to New York can cost more than a thousand dollars. Price-insensitive business travelers would continue to use those routes/flight options. On the other hand, the tourism-related flights like New York to Miami or Los Angeles to Hawaii, for instance, involve a relatively more flexible demand depending on the holiday season. Some airline may have such routes that they fare even though they are long-haul flights in a bid to increase the number of seats filled when bookings are low.
In conclusion, it can be said that the price for airline tickets increases due to various reasons such as increased operating costs, fixed overheads, consolidation and the absence of strong price competition, as well as supply and demand for certain flight options. In this case, it seems that, barring radical shifts such as emergence of a host of cheap-flight competitors, new plane technologies that can dramatically lower fuel costs, or a stagnant world economy, prices will continue to go up. The options that travelers will attempt to utilize to reduce expenses include flying low-cost airlines, flying through regional connections, booking in advance, or avoiding air travel all together if this is the long-term trend.