April 5, 2006

Airlines may soon find new obstacles to fare hikes

By Kyle Peterson

CHICAGO (Reuters) - U.S. airlines have managed to raise
ticket prices enough in the last year to boost the average
domestic fare by more than 10 percent, but experts say carriers
have nearly exhausted their pricing clout with travelers.

When the busy summer travel season ends, demand may taper
off so dramatically that airlines could lose their ability to
continue raising fares.

"I think the public is now conditioned to expect air fare
bargains," said Joe Schwieterman, a transportation expert at
DePaul University in Chicago.

"This summer, (airlines) should be fine because capacity is
going to be tight. There should be plenty of passengers to fill
up the planes," Schwieterman said.

He said that when demand flags in September, customers will
be far less willing to accept higher fares and the year-long
trend may end.

Major airlines such as UAL Corp.'s United Airlines,
Northwest Airlines Corp. and AMR Corp.'s American Airlines have
gradually increased fares as they grapple to keep costs as
competitive as possible.

In most cases, one airline tests the water with a fare hike
on selected domestic routes. Within a day or so, other carriers
match it. If competitors fail to match, the airline may retract
the increase.

Last week, United raised business fares by $50 each way to
offset the high cost of jet fuel. The carrier, which boosted
its yield by 4 percent in 2005, later scrapped the increase
after American declined to match.

Still, leisure fare hikes on certain routes that UAL also
tested were matched by most rivals.

Leading discount carrier Southwest Airlines Co., less
vulnerable to spikes in fuel prices because of its jet fuel
hedging strategies, have forced rivals to scotch fare hikes by
simply not matching them. Experts noted, however, that
Southwest's power over fares may dwindle as its fuel hedges run


Air fares rose 10.6 percent from February 2005 to February
2006, according to data from the Air Transport Association
(ATA), an airline industry trade group. But fares were still 16
percent lower than peaks before the September 11, 2001 terror
attacks on the United States. Concerns about more attacks
dampened demand for air travel and sent fares into a nosedive.

Further exacerbating airline woes, fuel prices rose to
record highs, and a glut of low-cost airlines ratcheted up
competition to the point where some carriers have been unable
to raise fares enough to cover expenses.

The ATA said the airline industry has not posted a profit
since 2000 and lost $32.3 billion between 2001 and 2004.

Stuart Klaskin of KKC Aviation Consulting said recent cuts
in airline capacity have allowed carriers to implement fare
hikes that have stuck.

"Clearly, demand is sufficient. They've been able to
justify these increases," Klaskin said. "I think there's still
some room for domestic fares at least to increase."

He said, however, that customers are used to cheap air
fares and that aggressive fares hikes could weaken sales.
Klaskin noted that demand for air travel is inconsistent,
because travelers have the option to find other transportation
or simply cancel a trip.

"The industry still does not have substantial pricing
leverage," he said.

Terry Trippler, an analyst at travel Web site
Cheapseats.com, disagreed. He said summer bookings are stronger
than they've been in years, and travel demand shows no signs of
letting up.

He said the same passenger who laments rising air fares
might also complain that rising gas prices make it too
expensive to drive. But prices are far from prohibitively high,
he said.

"Right now, Americans are not staying home," Trippler said.