Southwest leads way on higher airfares

July 06, 2006|By MEREDITH COHN | MEREDITH COHN,SUN REPORTER

When it comes to air travel, this is shaping up as the summer of the squeeze.

Airlines raised prices again this week following the lead of low-fare leader Southwest Airlines, which is pinching wallets up to $10 more per flight segment. At the same time, planes are nearly full, leaving little room for legs and luggage.

The fare increases are because of rising fuel prices, said officials at Southwest, which carries more passengers than any other U.S. airline and is the dominant carrier at Baltimore-Washington International Thurgood Marshall Airport.

"Rather than implementing a fuel surcharge, which is a hidden charge, we decided to be upfront and increase fares and say it's strictly due to fuel," said Edna Ruano, a Southwest spokeswoman.

Southwest raised fares just before the Fourth of July holiday weekend by $3 on flights from 751 miles to 1,000 miles and $10 on flights longer than 1,000 miles. There was no increase on short-haul flights. Most major carriers raised their fares to match Southwest's move on competing flights.

It was Southwest's fourth small fare increase this year. The $10 increase was the largest since March, when the carrier broke through its long-standing cap of $299 on one-way fares.

Dan Kasper, managing director of LECG, a Cambridge, Mass., consulting firm that tracks the airline industry, said Southwest had to raise fares to maintain its profit margins. Southwest has been nation's only consistently profitable airline since 2001.

He said the carrier is helping passengers adjust to higher prices by raising them a little at a time. The small steps also allow Southwest to see how much their price-conscious passengers will take before they stop flying.

"It's possible to reduce your total revenue by discouraging people from traveling," he said.

He said rival carriers have been watching Southwest, which had been able to keep prices down because of its extensive but declining fuel-hedging program. That has allowed the airline to lock in fuel supplies at prices well below current market prices. Other airlines, many of them just in or just out of bankruptcy, did not have the cash required to enter into such a program.

Since 2000, the airline industry has lost about $35 billion, according to the Air Transport Association of America. Labor and fuel are the two largest costs at an airline, with fuel amounting to about 20 percent to 30 percent of annual operating costs. The average cost of a gallon of jet fuel has more than doubled from 75 cents in 2001 to $1.95 in the first five months of 2006, the group said. Airlines consume about 1.3 million barrels of jet fuel a day.

The large number of people traveling - an estimated 207 million this summer compared with 204 million last summer - might not be comfortable but it's helping the industry, Kasper said. He said it was unclear if prices would continue to rise this summer, or what would happen in the fall.

Airlines that have been shifting planes overseas, or flying fewer planes, are expected to shift some capacity back to the U.S. market in the fall. The extra seats, coupled with weaker demand at the end of the vacation season, could keep prices from going higher.

For now, travelers will have to put up with the price increases, as well as a lot of on-board company, said Henry H. Harteveldt, a vice president and travel analyst for Forrester Research.

"I'm not surprised that they're raising their fares or that anyone else is raising their fares," he said. "Oil has been creeping up steadily. ... The higher the gas prices, we can all understand, the higher the fares."

meredith.cohn@baltsun.com

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