What does Coca-Cola have to do with airline fuel and ticket prices?

Yesterday, I shared an article with some comments from now-President of American Airlines Doug Parker on the rising cost of fuel prices. In his words Parker said, “We are not asking our customers to be happy with anything.” Never would I have thought that the sugary soft-drink Coca Cola would help me understand a simple economic principle.

What Parker was referring to was the lower cost of oil, and if that will translate into lower fuel prices, therefore lowering the cost of tickets. It’s an interesting question, and one that’s been posed a lot lately, now that gas has hit an all-time low. For me, in Virgina, I’m paying close to $1.60 a gallon which is pure bliss.

I was at the New York Times Travel Show this past weekend and sat in on a session by Peter Greenberg, Travel Correspondent for CBS. He said something that made me understand the conundrum between lower fuel prices and the lack of adjustment of ticket prices.

Greenberg announced to the audience that if the CEO of Coca-Cola were standing before the audience, and the price of sugar were to go down, would the price of Coke follow? In a resounding “no” from the crowd, Greenberg had proved his point. Just because the cost of the main ingredient goes down (for Coke, it’s the sugar; for airline ticket prices, it’s the fuel), that doesn’t mean the price will be adjusted accordingly. It makes sense you think about it. For once, airlines are actually making money and there’s no reason to lower their income simply because the price of fuel goes down – if anything, that increases their margins, as planes become more crowded and more seats are added.

I never thought Coca-Cola would help explain lower ticket prices to me, but I think this is an analogy everyone can take something away from.

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Comments

  1. Robert Davis says

    Yet in yesterday’s article you NEVER mention the CEO’s comment was pertaining to fuel price decreases! Yesterday’s article was a disservice.

  2. Peter Y says

    If there was a well known 50 cent “sugar surcharge” on every can of coke, your answer would have been a resounding YES

  3. Jeff S says

    I agree with Peter. It was the addition of the fuel surcharge that set up the expectation that prices would drop when fuel prices drop. If you say you’re raising prices because of the cost of the main ingredient, then there’s an expectation that your prices will drop when that ingredient’s price drops.

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