Looks like everyone's darling (WN) might be in for a bumpy ride in a couple of years. Happy reading.
Cheap airfares on final approach
Fuel costs, demand raising ticket prices
By Mark Skertic
Tribune staff reporter
Published February 14, 2006, 9:33 PM
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.
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."
Copyright © 2006, Chicago Tribune
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