Despite falling oil prices and a weakening U.S. Dollar, consumers in Latin America and the Caribbean shouldn’t necessarily expect cheaper airfares in . A complex interplay of factors, including taxes, regulations, and airline recovery strategies, is likely to offset any potential savings from lower fuel costs, according to industry analysis.
While lower oil prices are generally positive for airlines – fuel often accounting for 30% or more of operating costs – the benefit isn’t automatically passed on to passengers. The Latin American and Caribbean Air Transport Association (ALTA) explains that approximately 30% of the price a passenger pays is determined by elements outside of the airlines’ direct control. These include government taxes, airport fees, and operational regulations.
This means a significant portion of the fare doesn’t contribute to airline revenue, instead flowing to governments and airport operators. The situation is further complicated by the evolution of fuel surcharges. Originally intended as a temporary adjustment to offset increased fuel costs above a certain threshold, these surcharges have become less transparent and, increasingly, continue to rise even as oil prices fall. The renamed ‘YR Carrier-imposed surcharge’ can exceed $2000 on a round-trip business class ticket between the US and Europe, representing 20% to 30% of the total ticket cost.
A weakening U.S. Dollar could offer some relief to airlines operating outside the United States. A weaker dollar reduces costs in dollar-denominated expenses such as fuel, aircraft leasing, and maintenance. Globally, between 55% and 60% of airline costs are in U.S. Dollars, while only 50% to 55% of revenue is generated in the currency. However, this benefit is unlikely to translate into substantial fare reductions.
“With lower oil prices and a weaker dollar, there is some cost relief, but it is unlikely to translate into a significant drop in fares,” says Thomas Allier, CEO of the Latin American flight search engine Viajala. “Demand remains strong, capacity is still limited, and airlines are prioritizing the recovery of margins after COVID-19.”
The structure of airfares in Latin America and the Caribbean is particularly noteworthy. ALTA highlights the exceptionally high proportion of taxes, fees, and regulations compared to other regions. These charges can significantly influence the final ticket price, often independently of airline operating costs.
ALTA emphasizes that even with a more favorable macroeconomic environment – particularly regarding fuel costs – a direct reduction in ticket prices isn’t guaranteed. Airlines in the region operate with historically tight margins, making them vulnerable to external factors. Conflicts, supply chain disruptions, infrastructure limitations, and regulatory burdens continue to put pressure on costs.
The International Air Transport Association (IATA) forecasts a more balanced cost environment in , with fuel costs expected to fall by 0.3% to US$252 billion. This projection is based on an anticipated decline in crude oil prices to US$62 per barrel Brent (-11.0% from US$70 in ) and jet fuel prices to US$88 per barrel (-2.4% from US$90 in ). Despite this, IATA notes that the airline industry as a whole has yet to generate profits that cover its cost of capital.
However, IATA projects a net profit margin of 3.9% for , with potential earnings reaching a record US$41 billion. For Latin America, IATA anticipates a rebound in operating profitability in , driven by strengthening regional fundamentals, although currency fluctuations remain a critical obstacle.
Recent examples in Peru and Argentina illustrate how single policy decisions can significantly impact airfares in the region. In Peru, the extension of the TUUA (Transit and Airport Use Fee) to international connecting passengers is expected to increase ticket costs and potentially divert traffic. IATA estimates that the TUUA could limit international traffic growth to 3% annually through , compared to a potential 9% without the fee.
Conversely, Argentina’s deregulation of its airspace, including bilateral agreements and open skies policies, has fostered competition, increased route availability, and put downward pressure on fares. ALTA points to Argentina as a case study demonstrating that reducing regulatory burdens and expanding supply can lead to lower ticket prices.
the trajectory of airfares in Latin America and the Caribbean will depend on a complex interplay of macroeconomic factors, regulatory policies, and airline strategies. While lower fuel costs and a weaker dollar offer some potential for relief, they are unlikely to be the sole determinants of ticket prices. Airlines will continue to prioritize margin recovery, and external factors – including taxes, fees, and operational regulations – will play a significant role in shaping the fares passengers ultimately pay.
