A rise in jet fuel prices does not automatically translate into higher airfares, according to new research from Adelaide University that unpicks how Australian domestic ticket prices actually respond to fuel cost movements.
The study found that different types of fuel price shocks have very different effects on fares, with some lifting ticket prices, some having little impact, and others pushing fares in opposite directions across fare classes.
Published in the journal Research in Transportation Economics, the research examined business class, restricted economy and best discount airfares in Australia. It concluded that the source of the fuel shock matters more than the price change itself.
Fuel-fare link isn’t simple
“Not all fuel price shocks are economically harmful in the same way. The source of the shock matters greatly,” said Professor of Aviation Shane Zhang from Adelaide University‘s College of Engineering and Information Technology.
“At first glance, it may seem that fuel price increases can be easily passed on to consumers through higher fares. In reality, the relationship is more complex.
“Airfare adjustments are shaped not only by rising input costs, but also by airline pricing strategies, passenger behaviour, competitive pressures and consumer sensitivity to price.”
Jet fuel is one of the airline industry’s biggest costs, typically accounting for 25 to 40 per cent of total operating expenses. In Australia, where about 90 per cent of jet fuel is imported, how fares respond to fuel shocks is particularly significant.
Drawing on Australian domestic airfare data from the Bureau of Infrastructure and Transport Research Economics, the study separated fuel price shocks into three categories: supply shocks, aggregate demand shocks and jet fuel-specific demand shocks.
When supply is disrupted
Fuel supply shocks, which can be caused by events such as wars, natural disasters or disrupted supply chains, were found to have little direct impact on domestic ticket prices.
“This was one of the more surprising findings,” said Dr Yifei Cai from Adelaide University’s College of Engineering and Information Technology.
“Many people would expect airlines to immediately pass fuel cost increases on to passengers, but our results suggest airlines can often smooth these effects through fuel hedging, long-term supply contracts and other operational strategies.”
When premium fares rise
By contrast, aggregate demand shocks, usually linked to periods of economic growth, were found to increase business class and restricted economy fares.
“When economic conditions are stronger, travel demand tends to increase, particularly among business travellers,” Professor Zhang said.
“That gives airlines more room to raise prices in these fare classes.”
Splitting the cabin
The third category, jet fuel-specific demand shocks, produced the most complex effects. These can occur when market participants begin buying or hoarding oil over fears about future shortages, geopolitical risks or climate-related disruption.
The research found these shocks can reduce business class fares in the short term, as uncertainty dampens corporate travel budgets, while increasing discount fares as more travellers seek cheaper tickets.
“Oil-specific demand shocks are particularly destabilising because they can trigger sharp price increases without corresponding changes in actual supply or global demand,” Dr Cai said.
“Overall, the findings highlight that airfare responses are shaped not only by fuel costs, but also by passenger behaviour and broader macroeconomic conditions.”
Why it matters now
The findings land amid ongoing concern about fuel supply and aviation costs, which Professor Zhang said can act in more than one way at once.
“In the current context, fuel market disruption can act in more than one way,” he explained.
“On one hand, it can be understood as a supply shock, where the physical flow of oil or refined products is constrained. Our research suggests these supply shocks do not necessarily lead to immediate domestic airfare increases, because airlines may be able to absorb them.
“At the same time, uncertainty can create an oil-specific demand shock, where buyers respond to fears of future shortages. That can be more destabilising for aviation markets and may lead to very different fare responses across domestic and international routes.”
Dr Cai said the research could help passengers understand why fare changes are often uneven and not always tied to fuel price movements, while underlining for airlines the importance of flexible pricing and fuel risk management.
The team said it also carries implications for aviation fuel policy, carbon pricing and the shift to sustainable aviation fuel.
KARRYON UNPACKS: When a client asks why their fare jumped after oil prices hit the headlines, the answer is rarely a clean cause and effect. This research is a useful reminder that hedging, demand and cabin class all sit between the fuel price and the fare, which is exactly the nuance travel advisors can offer that a fare-comparison site can’t.
