Airfares Gain Altitude


United Air's $50 hike is sticking as carriers swallow big fuel bills. Airline stocks, meanwhile, aren't helped by the increases

The big U.S. airlines appear to have successfully pushed through the largest fare hike in recent years, at least for now. United Air Lines imposed increases as high as $50 on long-haul round-trip tickets late on Mar. 13, with other airlines matching through the weekend. Low-fare airlines such as Southwest Airlines (LUV) and AirTran (AAI) did not follow suit, as is their custom.

"It may raise eyebrows, but I think people can easily see what is happening in the oil markets and they know jet fuel is directly related to what they're seeing at the gas pump," says Tim Wagner, a spokesman for Fort Worth-based American Airlines (AMR), the largest U.S. airline by revenue.

The hefty fare increase came the same week crude oil futures rocketed from $105 to above $111 per barrel. On Mar. 17, West Texas Intermediate rose to a record $111.80 before plunging more than $3 on worries that a U.S.-led squeeze in the financial markets could become a full-blown, worldwide economic slowdown. "It's not something that our fares of two years ago were built for," says Beth Harbin, a Southwest spokeswoman.

United imposed a laddered increase of $5 to $25 per one-way flight, depending on short, medium, or long-haul trips. Most airlines matched that a day later, with Northwest Airlines (NWA) finally matching the hikes on Mar. 15. To date, most airfare increases have been on the order of $5 or $10 per trip segment. Just a week ago, for example, American and Delta Air Lines had raised fares by $10 to help recover part of their fuel costs.

Widespread Demand

The higher fares were no help to airline stocks, however, as widespread economic uncertainty and pricey crude oil continued to weigh on the sector on Mar. 17. The stock prices of American parent AMR closed 3% lower, Delta (DAL) was off 4%, and Northwest fell 6%, while United (UAUA) fell almost 8%, Continental (CAL) was down 5%, and US Airways Group (LCC) tumbled 10%.

Fare hikes were rolled back in a few fiercely competitive markets such as Orlando and Las Vegas. But for the most part the new prices will probably last for a while. "The rollbacks are much less…than anything that would start a downfall of this increase," Rick Seaney, CEO of airline-ticket research site Farecompare.com, wrote in an e-mail.

That's because of the timing: March is a heavy travel month for spring-breakers and the Easter holiday, meaning demand is robust with planes packed. Even if they don't succeed this time, expect the airlines to keep trying to raise fares out of sheer desperation.

Corporate Attention

On the corporate side, a $50 increase will likely be accepted as the cost of doing business at a time of soaring commodity prices, says Kevin Mitchell, chairman of the Business Travel Coalition. "It is an eye-popping number…there's no doubt that this will get the attention of a lot of travelers and a lot of CFOs," he says.

Still, most larger companies won't balk at the boost. The danger for the airlines, says Mitchell, lies primarily with smaller and midsize companies that may pay now for trips already planned but which may decide to limit travel in coming months.

Fueling Ticket Prices

Airline executives have long complained their industry has been at a disadvantage because cutthroat competition keeps carriers from passing along many fixed costs such as fuel. That situation has become only more severe in recent years as consumers turned to the Internet to more easily shop for bargains.

At the same time, jet fuel has become the largest expense for most airlines, with the spot price soaring from under $2 per gallon to a record $3.47 per gallon on Mar. 14. (Prices retreated a bit on Monday on the larger decrease in crude oil prices. The spot price for jet fuel fell nearly 4%, to $3.34 per gallon.)

The airline industry needs to make "our ticket prices reflect the cost of fuel," Delta CEO Richard Anderson said Mar. 14 in a telephone message to employees. He also announced the company would release a revised business plan for 2008 in response to fuel costs. "When you go to the gas pump to fill up your car, there's not someone standing there from Exxon [XOM] with a coupon ready to subsidize gasoline. And we can't do that in the airline business either."

Bachman is deputy news director for BusinessWeek.com.

Steve Ballmer, Power Forward
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