3 Ways Chuck Schumer’s Airfare Probe Ignores Economic Realities
on December 23, 2014
27 Comments
Last week, Senator Chuck Schumer (D-NY) said he wants the Department of Justice and the Department of Transportation to investigate why airfares are not decreasing along with falling oil prices.
On the surface, Schumer’s observation makes sense. Crude oil and jet fuel prices are strongly correlated, and on average jet fuel comprises a third of airlines’ operating expenses. As such, the declining cost of oil, and therefore jet fuel, should reduce airlines’ expenses, thereby giving them the opportunity to charge lower airfares to consumers.
[caption id="attachment_110349" align="aligncenter" width="473"]
Chart from U.S. Energy Information Administration. Blue is WTI crude oil, orange is jet fuel.[/caption]
The key word here is “opportunity.” Even though Schumer says “it’s safe to say that the airlines can afford to pass at least some of these savings onto the consumer,” reality is far from this populist idealism.
The airlines’ first obligation is to their shareholders and employees, who have legitimate claims to these savings in the forms of higher dividends and wages. Then there is the issue of the government telling private businesses how they should set their prices—as if Washington bureaucrats know the first thing about airline pricing strategy, arguably the most complex in existence.
Chart from U.S. Energy Information Administration. Blue is WTI crude oil, orange is jet fuel.[/caption]
The key word here is “opportunity.” Even though Schumer says “it’s safe to say that the airlines can afford to pass at least some of these savings onto the consumer,” reality is far from this populist idealism.
The airlines’ first obligation is to their shareholders and employees, who have legitimate claims to these savings in the forms of higher dividends and wages. Then there is the issue of the government telling private businesses how they should set their prices—as if Washington bureaucrats know the first thing about airline pricing strategy, arguably the most complex in existence.
