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Oil Prices Finally Catching Up To Fares?  
User currently offline777fan From United States of America, joined Jan 2006, 2492 posts, RR: 2
Posted (8 years 5 months 2 weeks 4 days 9 hours ago) and read 2329 times:

Looks like everyone's darling (WN) might be in for a bumpy ride in a couple of years. Happy reading.


777fan



Cheap airfares on final approach
Fuel costs, demand raising ticket prices

By Mark Skertic
Tribune staff reporter
Published February 14, 2006, 9:33 PM CST


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 increased fares $3 to $10 on selected 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 cutthroat, under $100 fares double by the end of the year," said Terry Trippler, an analyst with cheapseats.com.

The price hikes mark the reversal of two trends that have bedeviled the industry for several years: Rising jet 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 jump in fuel costs.

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

Fuel prices, while coming down, remain more than 50 percent higher than in 2004. Despite the 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 also are creeping upward.

If fuel prices surge again, fare increases will be more dramatic. 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, Dallas-based Southwest's chief executive.

Southwest has become the model for discount carriers, providing numerous flights a day to its destinations and low fares. It has been able to keep fares down because Southwest locked in prices for much of its fuel needs 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 slipped below $60 a barrel Tuesday.

Thirty percent of Southwest's needs are subject to fluctuations in the market, Kelly said. 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 requirement is hedged.

The hedges allow Southwest to put in gradual fare hikes "instead of having to make a big, huge sticker-shock-type step change in order to remain profitable," Kelly said.

Competitive pressures

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

"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 are more full.

The chances of having an empty middle seat next to you are becoming less likely. On average, flights are at 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, dramatically reduced their domestic capacity, lowering the number of seats available to travelers. The result has been more crowded planes and more demand for available seats, King said.

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

Fixed costs don't change

Operating a plane requires a myriad of fixed costs that do not change whether the cabin is filled with passengers or nearly empty. A pilot, first officer and flight attendants still are needed. The expense for the plane, mechanics, baggage carriers and others stays the same.

Once an airline makes enough to cover its fixed costs, revenue increases can boost the bottom line.

"Higher revenues and lower fuel costs is a recipe for improved financial performance in the airline industry," said Jake Brace, United Airlines chief financial officer. "Having said that, the fuel price we're starting from is exceptionally high, and we have a long way to go to get the kind of financial results we really need.

"It's headed in the right direction, but we have a lot of work to do. That's why we keep a focus on fuel conservation. We're going to keep a focus on getting our non-labor costs even lower."

United and other carriers have focused efforts on reducing fuel consumption, including taxiing planes at airports on a single engine or carrying less reserve fuel on flights.

Excess weight has come off of aircraft, antennas that weren't needed removed to reduce drag and more training done with mechanics, pilots and dispatchers to emphasize fuel-efficient operations, said United Capt. Jim Barnes, the airline's manager of operations efficiency.

Steps taken go as far as regularly washing the compression section of some aircraft engines. That saved nearly $1 million in fuel costs through the first nine months of last year, Barnes said.

"It's a little like washing your car engine," he said. "But in a jet engine, we found it can actually improve fuel efficiency."

mskertic@tribune.com





Copyright © 2006, Chicago Tribune


DC-8 61/63/71 DC-9-30/50 MD-80/82/83 DC-10-10/30 MD-11 717 721/2 732/3/4/5/G/8/9 741/2/4 752 762/3 777 A306/319/20/33 AT
8 replies: All unread, jump to last
 
User currently offlineLeskova From Germany, joined Oct 2003, 6075 posts, RR: 70
Reply 1, posted (8 years 5 months 2 weeks 4 days 8 hours ago) and read 2311 times:

Somehow, I don't get this strange pleasure some seem to be feeling at the prospect of WN having to raise fares because of oil prices...

Nonetheless - something just isn't making sense; considering that in some cases I now pay about the same in airport taxes/security fees/fuel surcharges alone for a Germany to US flight than what I paid as airfare including all taxes in 2000, I really am having problems in seeing the amounts airlines charging not being sufficient...

I've seen YQ-taxes (used for fuel surcharges by practically all European carriers) on some transatlantic tickets exceeding EUR150 for a return (admittedly some are around, or slightly below, EUR100) - while I can understand that airlines are using these fees to reduce the cost pressure they created themselves by offering fares with which they're not making money, I wish they'd at least try to move back towards a somewhat more truthful behavior by integrating those surcharges into the fare, where they ultimately belong.

After all, no-one honestly expects those fuel-surcharges to go down anytime soon, and certainly not at the same speed that they've gone up at - even if the oil price should start going down sometime.

As for fares with which the airlines aren't making money - it's hard to define which ones those are... because as long as an airline gets enough higher paying pax onto a plane, they can sell a number of seats at a loss without getting into trouble.

It's only when these rock-bottom fares are used to fill up the plane when things start getting ugly...

... because that's when they're effectively buying market share... and paying the price for it.

Whether it's worth it, is their own problem... but as long as they're doing that, well aware of doing it, I really don't see a basis for complaints: it's in their own hands to stop doing so. Whether they like the consequences, well, that's another subject.

Regards,
Frank



Smile - it confuses people!
User currently offlineIceTitan447 From , joined Dec 1969, posts, RR:
Reply 2, posted (8 years 5 months 2 weeks 3 days 23 hours ago) and read 2213 times:

Quoting 777fan (Thread starter):
Looks like everyone's darling (WN) might be in for a bumpy ride in a couple of years. Happy reading.

It is indeed happy reading. We'll see how they suffer like the rest. Smile


User currently offlineCasInterest From United States of America, joined Feb 2005, 4510 posts, RR: 2
Reply 3, posted (8 years 5 months 2 weeks 3 days 21 hours ago) and read 2213 times:

Yippy skippy,
By 2009, Southwest will have hedged at 60 and everyone will be Bi$ching about $100 oil.


Southwest is like every other airline out there, they are trying to make a profit.
However Southwest seems to be succeeding where most are failing.

Southwest does not offer the best or the most expansive service, but in their niche they do a fine job.



Older than I just was ,and younger than I will soo be.
User currently offlineIkramerica From United States of America, joined May 2005, 21476 posts, RR: 60
Reply 4, posted (8 years 5 months 2 weeks 3 days 21 hours ago) and read 2213 times:

Quoting CasInterest (Reply 3):
By 2009, Southwest will have hedged at 60 and everyone will be Bi$ching about $100 oil.

so you know that others haven't hedged at $60?

It's not that WN invented hedging, it's that at the time they locked in the best rates, most others were not in a financial position to do the same. But at this point, some have done so, and WN's lowball hedges are running out.



Of all the things to worry about... the Wookie has no pants.
User currently offlinePetmbro From United States of America, joined Jan 2006, 260 posts, RR: 0
Reply 5, posted (8 years 5 months 2 weeks 3 days 21 hours ago) and read 2213 times:

Quoting 777fan (Thread starter):
And some analysts predict that the days of $39 fares are coming to an end.

Coming to an end? When did they ever start? In all the flying I've done I have never in my life come across a $39 fare. When I've flown WN I've always paid at least $100 or more. The cheapest flight I've ever taken was for $89 on US. As much as I like the lower fares, I cannot see why all carriers charge so little per ticket to begin with. They are better off charging more for better service than committing suicide just to gain customers from the LCCs.
When I last travelled to California, I flew BDL-IAD-LAX-SFO-BDL on UA and it was somewhere in the neighborhood of $350, and that was nearly seven years ago in 1999. This year I was looking to go to SAN and for JFK-SAN-LAX-JFK on AA is only $237. If the airlines have the cost structure to do this then so be it but it's silly when you look at all the carriers who've sacrificed higher ticket prices at the expence of the employees. This business plan is one that is destine to fail.



"don't pee on my leg and tell me it's raining!" - Judge Judy
User currently offlineCasInterest From United States of America, joined Feb 2005, 4510 posts, RR: 2
Reply 6, posted (8 years 5 months 2 weeks 3 days 21 hours ago) and read 2213 times:

Others may hedge, but most don't seem to have the ability to find the right place to hedge big at like Southwest does. They continuously operate on a profit, and they have better utilization of the fleet and city destinations than many other airlines.

Of course they may eventually have payroll issues with other carriers, but it remains to be seen how much that is offset by fleet simplicity.



Older than I just was ,and younger than I will soo be.
User currently offlineBoomBoom From , joined Dec 1969, posts, RR:
Reply 7, posted (8 years 5 months 2 weeks 3 days 21 hours ago) and read 2213 times:

Shouldn't the title of this thread be:

"Fares Finally Catching Up To Oil Prices?"


User currently offline777fan From United States of America, joined Jan 2006, 2492 posts, RR: 2
Reply 8, posted (8 years 5 months 2 weeks 3 days 11 hours ago) and read 2151 times:

Quoting Petmbro (Reply 5):
In all the flying I've done I have never in my life come across a $39 fare.

I remember seeing $39 WN fares advertised when I lived in Baltimore. Most of them were BWI to Providence, Albany, Rochester (NY), "Boston" and the like. I've only used WN on the BWI-MDW route and can attest that the lowest one-way I can recall was in the neighborhood of $79 or so, putting the R/T on par with UA and AA.

For the record, I couldn't care less how/what WN does as I live in Honolulu and don't expect to fly them any time soon. No doubt they'll find a way to overcome the expiration of their current hedging (thru '09).

Out of curiosity, does anyone know if UA's bankruptcy exit allows them to being hedging oil prices (I would assume so). Seems like a great time to begin doing so and then announce a 787 order!



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