Airlines are facing a dilemma as they try to balance the demand and supply of flights during natural disasters. On one hand, they want to help stranded passengers and evacuate people from danger zones. On the other hand, they have to deal with rising fuel costs, limited capacity, and regulatory constraints. How do airlines cope with price surge during disasters? Here are some factors that affect their decision-making.
Demand and supply
One of the main reasons why airfares soar during disasters is the mismatch between demand and supply. When a disaster strikes, many people want to leave the affected area as soon as possible, while others want to fly in to help or reunite with their loved ones. This creates a sudden spike in demand for flights, which exceeds the available supply of seats and planes. Airlines have to adjust their prices accordingly to ration the scarce resource and cover their costs.
However, this does not mean that airlines are profiting from the crisis. In fact, they may incur losses due to the disruption of their normal operations. For example, they may have to cancel or reroute flights, pay extra fees for landing slots or parking spaces, provide accommodation or compensation for affected passengers, and deal with logistical challenges such as staff shortages, security issues, or damaged infrastructure.
Another factor that influences airfares during disasters is the cost of fuel. Fuel is one of the biggest expenses for airlines, accounting for about 25% of their operating costs1. When a disaster occurs, fuel prices may rise due to supply disruptions, increased demand, or geopolitical tensions. For instance, the recent invasion of Ukraine by Russia caused jet fuel prices to surge to 2008 highs2, adding pressure on airlines’ margins.
Airlines have different strategies to cope with fuel price fluctuations. Some of them hedge their fuel costs by locking in a fixed price for a certain amount of fuel in advance. This reduces their exposure to market volatility, but also limits their ability to benefit from lower prices. Others prefer to buy fuel at spot prices, which gives them more flexibility, but also exposes them to more risk. In any case, airlines have to pass on some of the fuel cost increases to their customers through higher fares or surcharges.
A third factor that affects airfares during disasters is the regulatory environment. Airlines have to comply with various rules and regulations that govern their pricing and operations. For example, they have to follow the minimum and maximum fares set by the government or the aviation authority in each market. They also have to abide by the consumer protection laws that prohibit unfair or deceptive practices such as price gouging or discrimination.
Some governments or regulators may intervene in the market during disasters to protect the public interest. For example, they may impose caps on fares, subsidies on flights, waivers on fees, or emergency measures on capacity or safety. These interventions may help alleviate the hardship faced by passengers or facilitate the relief efforts, but they may also distort the market signals and create inefficiencies or unintended consequences.
Airfares are determined by a complex interplay of demand and supply, fuel costs, and regulatory constraints. During disasters, these factors become more volatile and unpredictable, making it harder for airlines to plan and manage their operations. Airlines have to cope with price surge during disasters by adjusting their prices and services according to the changing market conditions and customer needs.