Pace of Fare Increases May Be Slowing

Airwise News, 4/2/2008

The rapid pace of air fare increases this year may be slowing as airlines brace for weaker demand, but their need to pass on fuel costs to travelers through new fees remains greater than ever.

Of the 10 fare increases initiated by legacy carriers in 2008, six have been broadly matched throughout the industry, giving them the traction to remain in place. But the last two attempts by Delta Air Lines to raise prices by USD$10 failed.

Delta's fare increase on March 27 failed to attract any matches by rivals and was promptly withdrawn.

"What that tells me is that (airlines) are being a little more cautious," said Rick Seaney, chief executive of fare tracker FareCompare.

Airlines been battered mercilessly by record high fuel costs, which are directly linked to oil prices.

One of the best ways they can offset that expense is through fare increases. Since 2006, carriers have had success boosting fares, overcoming the strong competition from low-cost airlines such as Southwest Airlines.

But experts have begun to speculate that economic weakness may erode travel demand, after several years of strong growth, putting pressure on fares.

In 2007, major US carriers attempted 23 sweeping domestic fare increases, of which 16 were successful, Seaney said. That impressively high success rate continued into 2008, although the pace is unsustainable, he said.

"The economy is going to start affecting some of the purchasing habits," Seaney said, adding that he expects a pause in the fare increase trend.

The ability of airlines to raise fares hinges on their responsiveness to demand for travel on particular routes.

Carriers have been strategically pulling capacity -- the number of seats for sale -- from less profitable routes and adding capacity to more lucrative routes that see less competition. As a result, planes have been fuller, and airlines earn more per flight.

Data from US airlines show planes are nearly full. In February -- typically a slow travel month -- American Airlines had a load factor of 76.9 percent, up 3 percentage points over February 2007.

Airline executives have said bookings remain strong heading into the busy summer travel season. Although concerns about the economy continue to taint industry outlooks, Calyon Securities analyst Ray Neidl predicted in a March 29 research note that the airline industry would lose more than USD$1 billion this year due to high fuel costs and weaker demand.

Airlines, however, are adapting by shrinking operations and cutting growth plans. Last month, Delta said it would cut 2,000 jobs through voluntary buyouts and scale back flights.

"Airlines are a cyclical business and we are now entering a trough in the cycle," Neidl said in the note. "What may make this one different for airlines is the fact that fuel prices remain stubbornly high."

As carriers are less able to raise fares, they have become more aggressive at finding new revenue streams.

Major carriers such as United Airlines and US Airways announced earlier this year that they would begin charging passengers a fee to check a second bag. The move, which has drawn criticism from some travelers, is a continuation of a trend toward unbundling some items and services that used to be included in the price of a ticket.

On Tuesday, Delta upped the ante, announcing a list of increased fees.

Among other changes, the carrier said it has raised the fee to bring a pet into a plane cabin to USD$100 from USD$75. The unaccompanied minor fee was raised to USD$100 from USD$50 for a nonstop flight. The price of a one-visit club pass was raised to USD$30 from USD$25.

"As we work to recapture the costs associated with record-breaking fuel, and to bring Delta in line with our competition, we have made some changes to fees starting today," said Delta.

(Reuters)