When you fill up your car at the gas station, you feel the high price directly in your wallet. You would think that the high fuel prices have a direct effect on the price you pay for your flight ticket. This assumption does not seem to be entirely correct. EUclaim explains the relationship between high fuel prices and the cost of your airline ticket.
Record high fuel prices
Especially at the gas station we have noticed it: fuel prices have reached a record high. The cost of fuel for our cars is largely determined by the price of crude oil. This is then subject to tax and excise. And that adds up! But it is different for paraffin. The price of paraffin also depends on the price of oil, but the effect is less pronounced. We will explain how this works.
The price at the pump is so high because demand for paraffin has been low for a long time
The price of crude oil, the raw material for our fuel, falls or rises according to market demand. With the outbreak of the corona crisis, we saw the price of crude oil drop. This was because we were flying and driving less en masse. So there was less demand, but enough supply. In such a situation, suppliers of crude oil try to sell their stock by making it cheaper.
In order to prevent the price from falling further, the OPEC countries and Russia have agreed to increase the supply of oil. In this way they ensure that the supply does not become too great. The price per barrel is now at about the same level as just before the crisis broke out.
But if crude oil is not more expensive, why are fuel prices so high? This is because paraffin is also produced during the production of petrol and diesel. It is not possible to make only diesel or petrol from a barrel of crude oil. Because we fly less, there is a surplus of paraffin. And that surplus has to be stored. This involves a lot of costs.
When selling petrol, diesel and LPG, refineries try to recoup these high costs. And that explains to a large extent why the prices of fuels at the pump have risen, even though the price of oil has not risen as much.
The price of paraffin is also rising, but less explosively due to less taxes
Unlike the fuel we get at the petrol station, we do not pay taxes and excise duties on paraffin. Excise duty for petrol is 45.6%, for diesel 34.9% and for LPG 23.8%. VAT is then charged at 17.4%. These costs do not apply to paraffin, as a result of which the price remains much lower and rises less rapidly than the prices for the other fuels.
However, the demand for paraffin is increasing again. And with it the price.
Hedging reduces the effect of fluctuating paraffin prices
Although we are seeing an increase in the price of paraffin, this does not necessarily have an immediate effect on your ticket price. A large aircraft easily holds 100,000 litres of paraffin. An enormous amount of fuel. Changing prices therefore have a direct impact on the costs for airlines.
Do airlines expect paraffin prices to rise? Then they have the option of purchasing paraffin in advance. This is also known as ‘hedging’: purchasing paraffin for a flight in the future. So there is a good chance that the paraffin for a planned flight has already been paid for and reserved as soon as the first tickets have been sold.
If the price of paraffin does not have a big effect on your ticket price, what does?
The paraffin is a big part of the cost of your flight ticket. But as we have explained, paraffin prices are more stable than fuel prices at the pump. So how come there is such a big difference in the cost of an airline ticket?
The most important element is market forces. Is there a high demand for a seat on a flight to Barcelona? Then you will pay more for it. So it can happen that passenger 1 pays € 50 for a ticket while passenger 2 pays € 200 for the same ticket. The goal of the airline is, divided over all passengers, to earn enough to cover the costs of the flight. And to make a profit, of course.
The tickets that are sold far in advance are often the cheaper ones. The closer you book to the departure date, the more expensive the ticket. This is because a lot of tickets have already been sold by then, so there is more scarcity. Market forces therefore have a much bigger effect on your ticket price than the price of paraffin.
The most decisive factor for airline ticket prices is market demand. Rising fuel prices do have an effect, but are less decisive for the price of your ticket than you would initially think. Also, we pay no tax or excise on paraffin. As a result, the price of paraffin rises much less quickly than the price of petrol, diesel and LPG. Do you want an affordable ticket? Make sure you book your flight ticket on time!
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