Facing costly fuel, airlines push fares higher

[February 29, 2012]  DALLAS (AP) -- Airfares are up and headed higher this summer.

Airlines blame soaring fuel prices, which could cost them billions more than last year. That means fares, which normally rise as the summer travel season nears, could increase faster than usual.

Airlines have already pushed through two price increases this year, and it's only February, when leisure travel is slow.

It's a sign of things to come.

"You'll see gradual increases and then a much bigger jump in April and May when people start shopping for the summer travel season," says Rick Seaney, CEO of travel website FareCompare.com.

The latest data on average fares show that Southwest charged $140 each way during the fourth quarter, JetBlue charged $156 and United Continental charged $270. Length of flight accounted for most of the difference -- on a per-mile basis, prices were similar.

The average fare rose 9 percent between January 2011 and January 2012, according to Airlines for America, a trade group of the biggest carriers. Fuel is driving the increases. The spot price of jet fuel rose 18 percent over the same period, according to government figures. Airlines burn 48 million gallons per day, making fuel their biggest expense.

There's little that airlines can do about fuel prices. They hedge, which is like buying insurance against big price spikes, and they've been adding more-efficient planes, but it takes years to replace a whole fleet.

The simplest response is to raise fares -- that's what they did nearly a dozen times last year.

Airlines will respond to higher fuel prices this year by boosting fares, running fewer sales, and cutting some flights, predicts Deutsche Bank analyst Michael Linenberg. He noted that despite a weak economy last year, the seven carriers in Airlines for America used the same moves to boost revenue by $14.1 billion, more than offsetting a $12.2 billion increase in fuel spending.

If they aren't careful, airlines could price more passengers out of the market.

That's what's happening to Jessica Streeter, a 27-year-old teacher and doctoral candidate in Philadelphia who took four plane trips last year. She and a companion planned to fly to Florida next month, but when fares shot above $300, they decided that they'll visit friends in Pittsburgh instead. A planned summer trip to Belgium with an aunt is looking doubtful unless they can find a last-minute deal.

"With the economy down, these fares are hard on people," she says. "It's hard to get away when you're on a budget."

Vacationers are usually the first to cut back on travel if it becomes too expensive. Americans are already paying an average of $3.72 a gallon for gasoline, up 30 cents in just the last month.

"About 75 percent of leisure travel is not essential," says George Hobica of the travel website airfarewatchdog.com. "Fares have reached a ceiling. I think you'll see more people stay home, or they'll drive or take the bus or the train."

Even business travel, which accounts for an outsized share of airline revenue, could be affected. Corporate profits rose strongly in 2011, which helped prop up business travel. But research firm FactSet, which surveys analysts, estimates that first-quarter earnings will barely rise.

Kevin Mitchell of the Business Travel Coalition, which represents corporate travel managers, says big corporations have set their travel budgets for the year. But at smaller firms, he says, "if it feels like it's getting more expensive, they'll cut back or look for cheaper ways to do things."

The big airlines have tried to raise prices four times this year and succeeded twice.

When they failed, it was because discount airlines such as Southwest and JetBlue declined to go along. Consumers will change airlines just to save a few dollars, and the Internet has made comparison-shopping much easier.

Still, when it comes to setting prices, the airlines are dealing from a position of strength. Since 2008, mergers have eliminated three major U.S. airline companies and reduced competition. That's made it easier for airlines to limit flights, charge higher prices, and return to profitability after losing money for most of the 2000 decade.

At higher fuel costs, more routes become unprofitable and targets for the chopping block. That will make it harder for passengers to get where they want to go.

Delta Air Lines will end flights between Miami and London in April. Demand was inconsistent, but "fuel is by far the biggest culprit there," says spokesman Trebor Banstetter.

In announcing that AirTran Airways would stop flying to several cities later this year, Bob Jordan, the executive who runs Southwest Airlines' AirTran unit, says, "there are some markets that we simply cannot make work" at current fuel prices.

The airlines say that over the long term, airfares have increased far less than other consumer goods and services. And although most U.S. airlines made money the last two years, there have been many years since 2001 in which they lost money. The industry's current recovery is tenuous.

Net profit margins at U.S. airlines fell to 0.3 percent last year from 1.6 percent in 2010, according to Airlines for America. The group's chief economist, John Heimlich, says that in the last decade airlines increased revenue by packing more people on the plane, but there just aren't many empty seats left anymore. Airlines need to raise more money to cover fuel, labor costs, and other expenses -- and that means higher fares.

The airlines' latest attempt to raise fares -- by up to $10 per round trip -- failed this week. But they won't stop trying.

"You win some; you lose some," Heimlich says of the attempted fare increases, "but there is no letup in the rising cost pressures. Fuel isn't the only one, but it's the biggest."

[Associated Press; By DAVID KOENIG]

Follow David Koenig at http://twitter.com/airlinewriter.

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