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Are 2016’s Rising Airfares Here to Stay?

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Dec. 4 2020, Updated 10:51 a.m. ET

Airline fares hiked

According to the International Air Travel Association, global airfares fell by ~5% in 2015 due to the tremendous fall in fuel costs.

Given that airlines across the industry have been forecast to beat record profits achieved in 2015 due to large savings from the oil price drop, consumers have expected a further fall in airfares.

On the contrary, on January 4, 2016, Delta Air Lines (DAL) started the year with an average airfare hike of about $3 per ticket one way. Southwest Airlines (LUV), American Airlines (AAL), United Continental Holdings (UAL), and JetBlue Airways (JBLU) soon followed suit, making the price hike a success. This hike was followed by four other price hikes, two of which failed.

According to FareCompare, these price hikes have led to a cumulative hike of $22 per round trip in the first two months of 2016.

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What can we expect in the upcoming year?

Aggressive capacity expansions and falling utilizations usually lead to price wars, which was the case in 2015. Also, consumer complaints regarding high airfares have been on the rise. Many consumer leaders, too, have lobbied for airfare decreases.

For now, the chances of airfares falling during the year looks bleak, with even low-cost carriers such as Southwest Airlines (LUV) initiating price hikes. However, this may change if demand growth takes a U-turn, which has been the case in the past.

Investors can gain exposure to airlines through the iShares Transportation Average ETF (IYT), which invests ~24% of its portfolio in airline stocks.

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