GogglesPisano
Pawn, in game of life
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Airlines may soon find new obstacles to fare hikes
Wednesday April 5, 9:50 am ET
By Kyle Peterson
CHICAGO (Reuters) - U.S. airlines have managed to raise ticket prices enough in the last year to boost the average domestic fare by more than 10 percent, but experts say carriers have nearly exhausted their pricing clout with travelers.
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When the busy summer travel season ends, demand may taper off so dramatically that airlines could lose their ability to continue raising fares.
"I think the public is now conditioned to expect air fare bargains," said Joe Schwieterman, a transportation expert at DePaul University in Chicago.
"This summer, (airlines) should be fine because capacity is going to be tight. There should be plenty of passengers to fill up the planes," Schwieterman said.
He said that when demand flags in September, customers will be far less willing to accept higher fares and the year-long trend may end.
Major airlines such as UAL Corp.'s (NasdaqNM:UAUA - News) United Airlines, Northwest Airlines Corp. (Other OTC:NWACQ.PK - News) and AMR Corp.'s (NYSE:AMR - News) American Airlines have gradually increased fares as they grapple to keep costs as competitive as possible.
In most cases, one airline tests the water with a fare hike on selected domestic routes. Within a day or so, other carriers match it. If competitors fail to match, the airline may retract the increase.
Last week, United raised business fares by $50 each way to offset the high cost of jet fuel. The carrier, which boosted its yield by 4 percent in 2005, later scrapped the increase after American declined to match.
Still, leisure fare hikes on certain routes that UAL also tested were matched by most rivals.
Leading discount carrier Southwest Airlines Co. (NYSE:LUV - News), less vulnerable to spikes in fuel prices because of its jet fuel hedging strategies, have forced rivals to scotch fare hikes by simply not matching them. Experts noted, however, that Southwest's power over fares may dwindle as its fuel hedges run out.
FARES FAR BELOW PRE-9/11 PEAK
Air fares rose 10.6 percent from February 2005 to February 2006, according to data from the Air Transport Association (ATA), an airline industry trade group. But fares were still 16 percent lower than peaks before the September 11, 2001 terror attacks on the United States. Concerns about more attacks dampened demand for air travel and sent fares into a nosedive.
Further exacerbating airline woes, fuel prices rose to record highs, and a glut of low-cost airlines ratcheted up competition to the point where some carriers have been unable to raise fares enough to cover expenses.
The ATA said the airline industry has not posted a profit since 2000 and lost $32.3 billion between 2001 and 2004.
Stuart Klaskin of KKC Aviation Consulting said recent cuts in airline capacity have allowed carriers to implement fare hikes that have stuck.
"Clearly, demand is sufficient. They've been able to justify these increases," Klaskin said. "I think there's still some room for domestic fares at least to increase."
He said, however, that customers are used to cheap air fares and that aggressive fares hikes could weaken sales. Klaskin noted that demand for air travel is inconsistent, because travelers have the option to find other transportation or simply cancel a trip.
"The industry still does not have substantial pricing leverage," he said.
Terry Trippler, an analyst at travel Web site Cheapseats.com, disagreed. He said summer bookings are stronger than they've been in years, and travel demand shows no signs of letting up.
He said the same passenger who laments rising air fares might also complain that rising gas prices make it too expensive to drive. But prices are far from prohibitively high, he said.
"Right now, Americans are not staying home," Trippler said.
Wednesday April 5, 9:50 am ET
By Kyle Peterson
CHICAGO (Reuters) - U.S. airlines have managed to raise ticket prices enough in the last year to boost the average domestic fare by more than 10 percent, but experts say carriers have nearly exhausted their pricing clout with travelers.
ADVERTISEMENT
When the busy summer travel season ends, demand may taper off so dramatically that airlines could lose their ability to continue raising fares.
"I think the public is now conditioned to expect air fare bargains," said Joe Schwieterman, a transportation expert at DePaul University in Chicago.
"This summer, (airlines) should be fine because capacity is going to be tight. There should be plenty of passengers to fill up the planes," Schwieterman said.
He said that when demand flags in September, customers will be far less willing to accept higher fares and the year-long trend may end.
Major airlines such as UAL Corp.'s (NasdaqNM:UAUA - News) United Airlines, Northwest Airlines Corp. (Other OTC:NWACQ.PK - News) and AMR Corp.'s (NYSE:AMR - News) American Airlines have gradually increased fares as they grapple to keep costs as competitive as possible.
In most cases, one airline tests the water with a fare hike on selected domestic routes. Within a day or so, other carriers match it. If competitors fail to match, the airline may retract the increase.
Last week, United raised business fares by $50 each way to offset the high cost of jet fuel. The carrier, which boosted its yield by 4 percent in 2005, later scrapped the increase after American declined to match.
Still, leisure fare hikes on certain routes that UAL also tested were matched by most rivals.
Leading discount carrier Southwest Airlines Co. (NYSE:LUV - News), less vulnerable to spikes in fuel prices because of its jet fuel hedging strategies, have forced rivals to scotch fare hikes by simply not matching them. Experts noted, however, that Southwest's power over fares may dwindle as its fuel hedges run out.
FARES FAR BELOW PRE-9/11 PEAK
Air fares rose 10.6 percent from February 2005 to February 2006, according to data from the Air Transport Association (ATA), an airline industry trade group. But fares were still 16 percent lower than peaks before the September 11, 2001 terror attacks on the United States. Concerns about more attacks dampened demand for air travel and sent fares into a nosedive.
Further exacerbating airline woes, fuel prices rose to record highs, and a glut of low-cost airlines ratcheted up competition to the point where some carriers have been unable to raise fares enough to cover expenses.
The ATA said the airline industry has not posted a profit since 2000 and lost $32.3 billion between 2001 and 2004.
Stuart Klaskin of KKC Aviation Consulting said recent cuts in airline capacity have allowed carriers to implement fare hikes that have stuck.
"Clearly, demand is sufficient. They've been able to justify these increases," Klaskin said. "I think there's still some room for domestic fares at least to increase."
He said, however, that customers are used to cheap air fares and that aggressive fares hikes could weaken sales. Klaskin noted that demand for air travel is inconsistent, because travelers have the option to find other transportation or simply cancel a trip.
"The industry still does not have substantial pricing leverage," he said.
Terry Trippler, an analyst at travel Web site Cheapseats.com, disagreed. He said summer bookings are stronger than they've been in years, and travel demand shows no signs of letting up.
He said the same passenger who laments rising air fares might also complain that rising gas prices make it too expensive to drive. But prices are far from prohibitively high, he said.
"Right now, Americans are not staying home," Trippler said.
