Airline mergers could quicken rise in ticket prices, fees

Average airfare is up 10.2 % from year ago

April 30, 2008|By The Wall Street Journal

Airfares are on the rise as airlines keep a tighter rein on flights and seats - and that rise could accelerate if industry merger efforts bear fruit.

The average cost of airline tickets in the United States was up 10.2 percent last month compared with a year ago, according to the Bureau of Labor Statistics, as airlines struggle with surging fuel prices and a softening U.S. economy. Over the same period, overall inflation rose 4 percent.

Already this year, most of the more than a dozen price-increase attempts have been matched by rivals. UAL Corp.'s United Airlines introduced a fare increase of as much as 5 percent on domestic fares Thursday. Competitors quickly followed. On Monday, Delta Air Lines Inc. raised its fuel surcharge by as much as $20 on each leg of domestic fares, pushing its round-trip fuel surcharge to more than $100 on some routes.

Many in the industry hope mergers can eliminate seats and competitors and give airlines even greater pricing power. UAL is in talks with US Airways Group Inc., according to people familiar with the matter. UAL tried to reach a deal with Continental Airlines Inc., but the latter carrier said Sunday that it wasn't interested. UAL's merger efforts follow Delta's proposal to acquire Northwest Airlines Corp.

Airlines say fare increases and other charges - such as fees for on-board services such as meals or for checking a second suitcase - are the only means left for airlines to stanch widening losses after years of other cost-cutting.

"The low-hanging fruit is gone," said David Castelveter, a spokesman for the Air Transportation Association. "Carriers now have to go for the high-hanging fruit, which includes higher prices."

Between mid-April 2006 and last week, the average low-price round-trip ticket from Atlanta to Chicago bought at least seven days in advance rose 23 percent to about $541, according to Farecompare.com. The average fare between Boston and Los Angeles climbed by 39 percent to about $458. But the price of jet fuel soared by 70 percent over the same period, according to the federal Energy Information Administration.

Until recent months, fare increases were more modest. Even as oil prices began their march toward $100 a barrel and higher four years ago, airlines feared higher fares would drive away passengers. Healthy discount airlines also proved ready to undercut them.

But airlines have grounded airplanes and retrenched on some routes in recent years as companies moved to reverse years of losses. Overall, domestic capacity since 2000 has grown by only about 6 percent in terms of available seat miles, an industry measure, according to the Bureau of Transportation Statistics.

With strong demand for travel in recent years, that has led to increasingly crowded planes and a greater ability by carriers to charge more. U.S. airlines last year flew with planes that were about 80 percent full, higher than at any other time in the industry's history, according to the Bureau of Transportation Statistics.

Rising fares carry risks. They could intensify political and regulatory scrutiny of potential mergers. They could also discourage fliers.

In particular, carriers risk losing some price-sensitive passengers, such as leisure or small business travelers, in order to squeeze additional income from regular business travelers, who provide the lion's share of revenue.

Bargain-hunting passengers "are just there to pad out what's left," said Rick Seaney, chief executive officer of Farecompare.com, which tracks price changes in tickets. "If consumers start to push back, the airlines will be smart and continue to lean as much as possible on the business traveler side."

Business customers are likely to take a hard look at the way they book their travel. While smaller businesses with less financial muscle are likely to scale back all but the most essential trips, major corporations will push travel managers to identify new ways to cut costs through centralized booking, more aggressive negotiations with airlines, or stricter enforcement of company travel rules.

Discount airlines, which because of their lower costs historically haven't mimicked fare increases by major network carriers, are beginning to raise prices. Southwest Airlines Co., the low-cost pioneer and the only major U.S. carrier that didn't post a loss for the first quarter of 2008, said recently that the run-up in fuel prices is forcing it to pass the higher costs on to passengers.

"With energy prices at these levels, we have to increase fares," said Gary Kelly, the airline's chief executive, during the company's earnings presentation April 17. "We'll have to be looking for opportunities to do more."

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