In 2022, drivers are overwhelmed with sticker shock, as gas prices have reached previously unheard-of highs. Airline prices aren’t far behind, increasing at record levels.

Yi Jiang, Cal State Fullerton professor of finance, recognizes the correlation between rising fuel prices and hiked-up airfare. But the reverse – a decline in airfares when gas prices drop – isn’t the norm.

Jiang is the co-author of the 2022 study, “Price asymmetries in the US airline industry,” published in Financial Review along with her fellow researchers, Miaomiao Yu of Louisiana State University and Tingting Que of University of Alabama in Huntsville.

We asked Jiang to share a bit about her research and its implications.

Your research finds that average airfare increases in response to rising fuel costs but doesn’t decrease when fuel costs come down. What are some reasons for this? 

The airline industry is often criticized for being excessively anti-competitive. When there are a small number of competitors in the industry, it is easier for airlines to agree not to compete head to head, which leads to asymmetric pricing.

A major cause of this pricing is focal price collusion by airlines. We find highly concentrated markets (less competitive markets) will exhibit more price asymmetries than in low concentration markets (more competitive markets), which supports focal price collusion by airlines. We also find that when airlines are owned by common investors, it is easier for airlines to agree not to compete.

The second reason is capacity collusion. We find that to maintain the higher price, airlines collude with their competitors to reduce the number of seats that they as a group offer for sale.

Third, we find that first-class airfares are shown to fall more slowly than economy-class airfares with a fuel cost decrease.

With rising fuel prices, how will this impact the airline industry?

Jet fuel cost represents the major cost for airlines and volatility in fuel cost levels imposes significant risk on the airline industry. With rising fuel prices, airlines raise ticket prices accordingly. In my new research project, “Asymmetric Pricing and Airline Performance,” I find that raising ticket prices, regardless of whether the fuel cost is increasing or decreasing, is associated with significantly higher sales growth and stock returns than reducing prices in the same scenario.

Do you see a move toward alternative jet fuels for airplanes in the same way that there is a move toward electric vehicles? 

I haven’t seen airlines move toward alternative fuels in the same way that land vehicles have, perhaps because the airline industry is anti-competitive, and it is easier for major airlines to collude to boost prices and limit the number of tickets they sell to maintain high profits.

Your research supports the thesis that tacit collusion among competitors plays a role in high airfare prices. What are some solutions to this? 

Our paper speaks to an ongoing debate among policymakers regarding how to best promote market efficiency in the airline industry. We call for the Justice Department’s investigation of whether some of America’s biggest airlines have colluded to keep airfares high and limit the number of tickets they sell.

What motivated you to research this topic? 

A series of bankruptcies and mega-mergers over the past decade has slimmed the number of major U.S. airlines from nine to four, and those carriers — Delta, Southwest, American and United — fly about 80 percent of all domestic passengers. With rising fuel prices, consumers are suffering rising fares and other added charges that seem to be the result of excessive market power concentrated in too few hands and potential misuse of that power. When jet fuel prices drop, ticket prices haven’t followed, which motivates me to research this topic.

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