Competition is the mechanism that lowers prices. No one can afford to pocket the difference. That's why despite airplanes becoming extremely fuel efficient over the last 50 years, ticket prices keep dropping.
> Why don't airlines simply pocket the difference??
I think they did, AA has a market cap of $8B and they spent $12B on stock buybacks from '14 - '20. Looks like all other domestic airlines did similar.
> That's why despite airplanes becoming extremely fuel efficient over the last 50 years, ticket prices keep dropping.
I think they just rearranged their profit centers. Having good prices, flight coverage, loyalty program & interchange agreements are the core product offering but they'll happily use them as a loss leader for the revenue from their agreements like branded credit cards via Citi & Barclay.
A large market cap and significant profits don't imply large profit margins. Look at Walmart for example: their market cap is over $300B but their net profit margins are in the 2-3% range.
> AA has a market cap of $8B and they spent $12B on stock buybacks from '14 - '20.
In 2014 their market cap was $35B [0]. Pandemic aside, it looks like they are steadily winding down their business. That makes sense if the company doesn't see any opportunities for growth--shareholders can migrate to investments with upside. Despite market cap shrinking by 2/3 they kept earnings per share relatively flat.
Without necessarily agreeing with the GP, flights are an elastic good and have a notion of an optimum price - airlines may have continued to make greater profits by making tickets more accessible. Fuel is relatively inelastic, and may have less pressure to lower prices to increase profitability.
It's possible to explain price fluctuations without competition, and large parts of the public don't have a lot of faith in competition as a market force.
Airlines certainly don’t make more profit with reduced ticket prices. If the oligopoly wanted to force consumers to pay premiums for tickets, they could, but the industry is largely competitive. The privatized airline industry is often a money pit. Even OTAs make a small fraction of their revenue from air travel.
Why don't airlines simply pocket the difference??