Oil prices have fallen dramatically in the past few months. Since fuel is the biggest expense for most airlines, many people are wondering whether this means they will be able to snag cheap plane tickets for the upcoming holiday season if they hold out long enough.
It's true that falling fuel prices often lead to lower airfares. However, supply has been very tight in the U.S. air travel market in recent years, so it may take a long time for airfares to come down. If you're looking to fly before the end of 2014, you should probably buy your tickets as soon as possible.
Fuel prices come down
In June, the average price for a barrel of Brent crude oil was nearly $112. However, oil prices fell during the summer, and the decline accelerated in September. For the past week, the price of Brent crude has been hovering around $85/barrel.
Consumers have benefited from this sudden turn of events. Gas prices have fallen more than $0.30 just in the last month, reaching levels not seen since 2010. More than half of U.S. gas stations are now selling regular (87-octane) gas for less than $3/gallon.
Airlines are also seeing big savings when they fill up their fuel tanks -- which can hold more than 50,000 gallons, in the case of jumbo-jets like the Boeing 747. The price of jet fuel has dropped about $0.50/gallon since June. This helped airlines earn record profits during the summer travel season, with more gains projected for the coming year if fuel prices remain near recent levels.
Airfares and oil prices
With lower jet fuel prices, airlines can make money while charging lower fares. However, airlines -- like other businesses -- want to make as much money as possible. Even if costs come down, they will try to keep fares up, if possible. Indeed, most major U.S. carriers raised fares by $2 each way in mid-October.
Airlines won't cut prices en masse unless they are having trouble filling seats. Airfares often drop soon after fuel prices fall because slowdowns in economic growth typically impact demand for air travel as well as demand for oil.
However, the recent oil price slide has been caused more by rising oil production in the U.S. and various OPEC states than by global economic issues. Additionally, even if air travel demand were sluggish, airlines wouldn't have trouble filling planes for the peak season around Christmas and New Year's Day. They would save the big discounts for off-peak travel periods.
The best fares for holiday travel may already be gone
Today, the supply demand situation in the U.S. air travel market favors airlines over travelers. That's especially true when looking at peak travel days around major holidays. If you're looking to travel during the holiday season, your best bet is to follow the advice experts normally give travelers. This means that you should look to buy tickets as soon as possible.
Tickets for domestic travel tend to be cheapest between three months and 30 days before departure. A recent study by The Wall Street Journal concluded that the cheapest tickets for domestic travel could be found 57 days before departure. For most of the holiday season, that deadline has already passed.
According to Rick Seaney of FareCompare, the absolute best time to look for cheap tickets is Tuesday at 3 p.m. (Mark your calendar!) Airline sales tend to begin on Tuesdays, while fare hikes generally happen on Fridays. That said, holiday season tickets are usually excluded from fare sales, so the exact day you look may not matter as much.
Will airfares ever drop?
In other words, if you're looking to book airline tickets for the holiday season, the fares you see now (or perhaps on Tuesday at 3 p.m.) are probably the best you'll ever see. Unfortunately, falling oil prices won't make your holiday air travel any cheaper. Airfares will only drop significantly when capacity growth starts to outpace demand growth.
This process is finally beginning. Delta Air Lines' preliminary guidance on 2015 capacity implied that domestic capacity could rise 3%-4%. Southwest Airlines is planning to grow a similar amount, after holding capacity roughly flat in 2014. A host of other discount airlines are planning even faster growth in the next couple of years.
If oil prices stay low, airlines are likely to take advantage of the opportunity to continue growing capacity. As market share competition increases, fares will gradually decline until profit margins return to a point where growth is no longer worthwhile for most carriers.
A couple of years from now, airline capacity may have risen far enough that airlines will be forced to pass through much of their fuel cost savings to customers to keep planes full. In the meantime, though, fares are likely to remain high despite the drop in fuel prices.
Adam Levine-Weinberg owns shares of Boeing. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.