Airlines Hike Fares, Consider Cost Cuts As Fuel Prices Soar

[Matt Molnar]

Dow Jones Newswires:

Airlines Hike Fares, Consider Cost Cuts As Fuel Prices Soar

March 17, 2008: 04:44 PM EST

CHICAGO -(Dow Jones)- With jet fuel prices up sharply this year, U.S. airlines have added hefty fuel surcharges to ticket prices and are mulling new cost- cutting plans to help them remain profitable in 2008.

But in a weakening U.S. economy, a slowdown in the growth of passenger traffic could cut into airlines' revenue, even as costs keep climbing.

So far, airlines have said that both business and leisure travel are strong, but there is increasing evidence that travel budgets are getting tighter. [Full Article]

* Delta may cut domestic schedule, rumors floating about offering buyouts to older employees
* Fuel surcharges all around, up to $50 round trip
* Southwest considering retiring some older aircraft sooner than planned

[JetBlueAirwaysFan]

That's funny, I looked at DL from DAB-LGA in June and the fare actually went down!

[mirrodie]

That's funny, I looked at DL from DAB-LGA in June and the fare actually went down!

I suppose you are lucky. Im just glad I booked my airfares for 2 trips last week :)

[T-Bird76]

The fares to Rome went up by 100 bucks, I'm glad I booked when I did.

[Lezam]

Its a good thing sun country started flying to florida, now we can actually get $80 tickets without blackouts! :)

[Art at ISP]

I know you guys are not going to like what I am about to say, but there is no place in today's world or economy for artificially low air fares any more. Airlines have to make money or they would not exist. The cost of air travel is significantly lower today than it was 20-30 years ago when adjusted for inflation as the COSTS keep going up. It is an unsustainable business model, and whether we like it or not it needs to change.

Fares not only need to be increased, they need to be RATIONALIZED. The last minute business traveler has been gouged for years, and has subsidized these $99 fares which are a contributing cause of the airlines' woes. An airline manager told me once that if he could raise bottom fares by $20, he could lower top end fares by $300. When I said "so do it", he said it wasn't that simple....but in the end it is.

The airline business is the only one I know of which does not price according to cost plus markup. The entire yield management system today is outmoded and no longer works.

If you look at WN, they have a simple fare structure--and as much as they want you to believe it, they are not very often the lowest price, but they want you to THINK they are. A big difference, however, is that last minute business travelers, while they do pay more, are not gouged as other airlines do.

US for example charges $900 or more for PHL-BOS last minute travel. I just priced WN on PHL-MHT and the Business Select fare was $123 each way. The average distance is about 350 miles between the two. At approximately 9 cents a mile cost (WN), it costs them $31.50 to carry one passenger on that route. Even with other costs added in, they still make a neat profit-- $123 for something costing about $31.50. US on the other hand, charges $450 one way, while their cost is estimated to be about 14 cents a mile (using rough CASM estimates), so it cost them $49 to carry the same passenger a similar distance.

The difference between the two is that WN will sell a higher percentage of those higher fares on not only this but most other markets--so if you look at AVERAGE fares, I bet they are significantly higher for WN than US. The disparity comes in as more and more business travelers will no longer pay the exhorbitant fares charged for last minute travel. Now the cushion is gone, and before you know it, US is in the red.

Compounding that issue is the frontal assault made by US toward it's most loyal and highest yield customers. They have made disapraging comments about Frequent Flyers before, and recently dumped the 500 mile minimum accrual for short flights--making even MORE higher yield customers leave US.

The bottom line is that the entire business model needs to change, and fares need to come more into line with what it actually COSTS to provide the service.

Rant over....

[bonanzabucks]

I'm not so sure that fares are really "artificially low" anymore. I have to go to London in a few weeks for a business trip and I was looking into booking my trip and the cheapest I found was $580 for a nonstop flight (it is slightly cheaper if you have a stopover). I remember looking into going last year and the fares were around $400. Prices have increased dramatically since then.

Now, airlines were profitable last year. Why? Because they sharply reduced their cost structure. They mostly reduced their costs as a result of sharply higher fuel costs, which were sky high even back then. With oil now between $100-$110 a barrel, jet fuel has doubled in the last year. It now accounts for 70% of airline expenses, depending on the airline and how they hedged their fuel. I'd say airlines are within crisis mode now. How much more can they reduce their costs by? What kind of service will they be offering when oil hits 90% of their operating costs? The fare model Art suggests just doesn't exist anymore with oil prices what they are now and accounting for the vast majority of airline expenses. My point is that this is totally unprecedented and not normal and their cost structure was fine last year considering most were profitable. Something really has to be done about oil prices or alternative fuel or the airline industry will be destroyed. This is totally out of their control. Look how oil prices are increasing the price of everything.

Here's an article that outlines how high fuel costs are changing the way the industry is doing business.

http://www.foxbusiness.com/markets/indu ... 267_8.html

Seriously, does anyone truly think $100+/barrel prices are justified?

[hiss srq]

At this point and I encourage most people would be ill advised to join the airline industry and the F bomb is now being tossed around at many carriers.

[mirrodie]

Art, I can see your POV as the business traveler.

However, as the leisure traveler whose constantly having services stripped if they are not in J or F, I have a problem spending an extra $20.

I'll gladly pay $50 more on every ticket if I were given some nuts or apples on the plane(I'm not talking hot food), a drink and maybe a smile rather than a disgruntled obligatory, "thank you, buh bye" Also Had it not been for 9-11, AA's MRTC was worth it.

Today, the leisure traveler has to figure out where to spend their nickels. Why? AA, CO, UA, WN, NW, their coach cabins are all the same. THere is no marked difference for me to chose one over the other, os why spend that extra 20 or 50?