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Will lower fuel prices cut airfares?

With tens of billions of dollars spent each year on aviation fuel, the recent drop in energy prices would seem to be a boon for airlines.

So, why is at least one industry analyst worried?

It's not because it's thought that airlines will cut fares to match their reduction in costs. The airlines have made clear that isn't going to happen.

But analyst Hunter Keay of Wolfe Research worries that lower costs will prompt airlines to boost capacity unwisely and unprofitably. The industry returned to vibrant health after it throttled back its flying. Now, will it push the throttles forward?

But other analysts have offered different views, that companies would be wise to boost output if lower expenses allow it, or that there's little sign that capacity is getting out of hand.

In any case, the airline industry has shrugged off suggestions that lower fuel prices should bring lower airfares, as John Heimlich, vice president and chief economist of trade group Airlines for America, explained in a recent conference call.

"The first priority is to make sure you have strong financial health, can pay down your bills and invest in the future and weather the next recession," Heimlich said.

And, he noted: "We don't really hear people clamouring for lower prices of cheeseburgers when the price of beef comes down or lower prices of iPhones when the price of semiconductors go down".

Southwest Airlines chairman and chief executive Gary Kelly said he's worried about the volatility of fuel prices, even with the current drop in energy costs.

"You remember 1999. Crude oil, I think, went down to $10 a barrel, only to be followed with increases every single year for the next decade. It was just an unprecedented spike that took place. So, that's what worries me," he said.

Based on 2013 use of 15.9 billion gallons, each cent drop in jet fuel prices saves the US airline industry $US159 million ($A172.03 million) annually.

While that can add up to some big savings, Keay, the Wolfe Research analyst, has held to a theory that links higher fuel prices to the potential for higher airline profits.

When the economy is doing well, fuel prices tend to be higher, but more people will fly and will pay more to do so, he suggests. Higher fuel prices also keep airlines from investing in flights that are marginally profitable if at all.

"We are increasingly uncomfortable with the longer-term impact from lower oil prices as it relates to our investment thesis on airlines," Keay wrote in an October 30 report. "For years we've said high oil prices are good for airlines, so it would be intellectually dishonest to say low oil prices are also good for airlines."

Taking a different view is analyst Jamie Baker of JP Morgan.

He said it makes sense for companies like airlines to increase output - add capacity - if their input costs go down.

"We expect firms to maximise profits, and lower fuel suggests incremental growth is warranted. We take umbrage to the view that oil prices and equity values are somehow correlated, that lower fuel is a negative, and that airlines should turn a blind eye to input costs," Baker wrote.

"The better gauge of discipline, in our view, is whether managements similarly reduce planned capacity should oil revert to (northern) summertime levels."

A third analyst, Michael Derchin of CRT Capital, said that investors concerned about "capacity creep" have nothing to worry about. He analysed airline schedules for the next six months and found capacity up three per cent, about as much as the expected growth in GDP.

"Based on our analysis of the United States carrier schedules over the next six months, we found no evidence of capacity creep," he wrote. "Our estimated fuel cost savings are not likely to be competed away."