Business Travel Tip: Reasons Behind Rising Airfare Prices

Since January, domestic airlines have hiked airfares six times, as compared to four times for all of 2010. What’s the reason behind these rapid-fire increases?

As many people might guess, jet-fuel costs are the biggest driver, with prices up around 50% from last year. The International Air Transport Association [IATA] estimates that every $1 added to the cost of a barrel of oil equals $1.6 billion in added costs to the airline industry.

Allegiant Airlines is considering hedging its bets with “variable price” tickets, where a fee will either get tacked onto or subtracted from your ticket price once you get to the airport depending on the price of jet fuel on the departure date -- a risk most travelers won’t want to take.

But besides airlines’ overhead costs, here are a few other reasons airfares keep rising:

Business Travelers are Back. The Global Business Travel Association [GBTA] expects a 5% increase in business travel spending this year, continuing last year’s upward trend. Business travelers, the lifeblood of the airline industry, are less price-sensitive than their vacationing counterparts. They also tend to be last-minute bookers, meaning airlines will hold back more seats in anticipation and be able to charge a higher price for the late reservations.

Consolidation. It’s the simple law of supply and demand. Due to mergers, fewer airlines are flying the same route, giving them more room to raise ticket prices – especially between cities popular with business travelers. Planes are also more crowded since airlines are flying at fuller capacity, so they’re not desperate to discount prices in order to sell every seat.

Worldwide Uncertainty. Clashes in the Middle East and North Africa are pushing oil prices higher due to worries over oil supply disruptions. Last week’s massive earthquake in Japan disabled several of the country’s oil refining facilities and nuclear power plants – factors that could increase their demand for foreign oil, further increasing prices and putting stress on global oil supplies.

How high will airline ticket prices go? It’s hard to predict at this point, but even business travelers will reach a limit on what they’ll pay. The rebounding of the corporate travel market could be thwarted if airfares continue to skyrocket and corporations decide that virtual meetings or teleconferencing are a viable substitute for face-to-face interactions.