Airfares expected to rise in 2006 as more people fly

February 15, 2006|By MARK SKERTIC | MARK SKERTIC,CHICAGO TRIBUNE

Travelers will need to get used to paying more for an airline seat in 2006, experts warn.

Even as fuel prices have begun to drop in recent weeks, fuller planes have emboldened carriers to get over their fears of raising ticket prices. Some carriers have raised fares $3 to $10 on some routes in recent weeks. And some analysts predict that the days of $39 fares are coming to an end.

"Airlines are realizing they can't keep selling tickets for a loss. Expect to see those cut-throat, under $100 fares double by the end of the year," said Terry Trippler, an analyst with cheapseats.com.

The price increases mark the reversal of two trends that have bedeviled the industry for several years: Rising fuel prices have been blamed for dragging down airline earnings and wiping out profits while fierce competition has prevented many carriers from boosting fares to offset the increases.

"Even if there are no fuel price increases, I expect we will see more ticket price increases," Trippler said.

Fuel prices, while dropping, remain substantially more than they were in 2004. Even with the recent slight decreases, even relatively healthy carriers continue to feel pressure on their bottom lines.

Southwest Airlines, the only large carrier to post a profit last year, recently raised fares up to $3 each way. The ticket prices of other carriers are also creeping upward.

If fuel prices shoot upward again, fare increases will be more. But, even if fuel costs continue to drop, ticket prices are unlikely to move in the same direction, Trippler said.

Deciding when to raise fares - and by how much - is a balancing act, said Gary Kelly, Southwest's chief executive.

Southwest has become the model for discount carriers, promising numerous flights a day to its destinations and low fares. It has been able to keep fares down because it locked in prices for much of its fuel years ago.

That effort, known as fuel hedging, is the envy of the industry. This year, Southwest has more than 70 percent of its fuel needs hedged at $36 a barrel for crude oil. The price on the open market is about $30 higher.

Thirty-percent of Southwest's needs are still subject to fluctuations in the market, Kelly noted. Future fuel needs also continue to be a challenge. Southwest has much smaller hedges in place in the coming years. By 2009, just 30 percent of its fuel needs are hedged.

The hedges allow Southwest to increase fares gradually, "instead of having to make a big, huge sticker shock-type step change in order to remain profitable," Kelly said.

His airline also is subject to the pressure of competitors trying to undercut them.

"Every year, I would assume - and I really mean that word - that we would think about fare increases," Kelly said. "Obviously, the more modest we can make them, I think the more successful we will be in actually realizing the fare increases."

Some of Southwest's competitors, particularly large airlines, are more confident about raising fares because demand is high and planes have more passengers. On average, planes are packed to nearly 75 percent capacity, up slightly from a year ago, said Roger King, aviation industry analyst with research firm CreditSights.

Several carriers that are reorganizing in bankruptcy or who recently emerged from court protection sharply reduced their domestic capacity, lowering the number of seats available to travelers. The result has been fuller planes and more demand for available seats, King said.

"More people means higher prices," he said. "Because there's more demand."

Mark Skertic writes for the Chicago Tribune.

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