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Lots of Lift in Air Fares

By Dan Schlossberg
ConsumerAffairs.com

February 24, 2006
Rising airfares will be a fact of life for the foreseeable future, according to several industry analysts.

Emboldened by fuel prices that have risen by more than 50 per cent in two years, fare hikes have been imposed by carriers confident they can hike prices without losing passengers.

Even Southwest, the only large carrier that posted a profit in 2005, posted a recent increase ($3-$10 on some routes) without jeopardizing its credibility as a discounter. JetBlue, after posting a fourth-quarter loss, is likely to follow suit.

Rising fuel and labor costs, coupled with fierce competition, killed Independence Air, a Dulles-based discounter, and sent Delta, Northwest, and USAirways into bankruptcy � a status United just escaped by becoming leaner and meaner (fewer planes, fewer routes, and fewer employees).

"Airlines realize they can�t keep selling tickets for a loss," said Terry Trippler of cheapseats.com. "Even if there are no fuel price increases, I expect we will see more ticket price hikes."

Heavy dependence on imported oil from the unstable Middle East continues to be a sword of Damocles for U.S. carriers � with the sole exception of Southwest. Years ago, it signed long-term deals that cover almost three-quarters of its 2006 crude oil needs at a price of $36 � nearly half the current rate.

By hedging its bets, Southwest faces fewer fuel problems than competitors for the next few years. It will also require fewer and more gradual fare hikes to compensate for falling revenue. On the other hand, the agreements are dwindling, with only 30 per cent of the carrier�s 2009 fuel needs covered by advance planning.

Southwest chief executive Gary Kelly says the line has been able to keep fares down because of its crafty fuel-price planning. "We don�t have to make a big, huge, sticker-shock-type step change in order to remain profitable," he said.

For all airlines, cutting fuel consumption has become almost as big a priority as air safety. Planes now carry less reserve fuel, taxi to runways on a single engine, and operate with less excess weight. Pilots, dispatchers, and mechanics have also received directives regarding ways to boost fuel efficiency.

According to Jim Barnes, United�s manager of operations efficiency, the airline saved $1 million in fuel costs over the first nine months of 2005 just by washing the compression section of aircraft engines. "It�s a little like washing a car engine," he said, "but we found it actually improves fuel efficiency."

With further fuel hikes expected, most carriers aren�t concerned about hiking fares.

A reduction of overall capacity caused by bankruptcy reorganization has lowered the number of available seats, resulting in packed planes. More demand invariably means higher prices because the public will pay for a product it desires even when that product becomes harder to obtain.

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