The £1,000 flight that explains the oil market

A lesson in price signals from British Airways

(Credit: Petr Kratochvil)

On certain days, British Airways will quote you north of £1,000 to fly from Edinburgh to London in business class. Which, let’s face it, is a little steep for less than 90 minutes in the air and not a flat bed in sight. Why do they do it? How do they get away with it? Cue the national sport that is BA-bashing.

Except, not this time. You see, it isn’t for a lack of competition — not when easyJet and Ryanair will get you there for far less¹ and in similar levels of comfort, while the train offers a slower but more serene alternative. Instead, it’s priced so high for the simple reason that British Airways really doesn’t want you to fly with them.

They would much rather keep that seat clear for someone else — namely, someone looking to fly a far more lucrative route from Edinburgh to, say, New York, and who has no choice but to transit via Heathrow. That itinerary might fetch several thousand pounds, even more at short notice.

Don’t get me wrong, if you willingly hand over a grand for a domestic flight, BA will gladly take it. But they’re pretty sure you won’t, because their customers respond to price signals.

Dire Straits

Returning for a moment to the question posed but left conspicuously unanswered in yesterday’s newsletter: why isn’t oil at $200? This is a market that magically lost almost one billion barrels in the first 10 weeks of the war. Here’s where we left off:

Lloyd Blankfein, former chief executive of Goldman Sachs, explains it thus: “The market is assuming it can’t last for a long time and therefore it won’t last for a long time.” Put another way, if you were looking to take out zombie apocalypse insurance, I would gladly provide it. Not because I’m licensed by the Prudential Regulation Authority, let alone have the money to pay out. But because, should such an eventuality materialise, no one will be paying out. It is a zombie apocalypse — contract law will have been superseded.

But that isn’t the whole story, of course. Suppliers and buyers of oil respond to price signals just as British Airways passengers do.