Airfares are rising again, and travelers should brace for more price increases.
United and Continental started the latest price hike Wednesday by adding $20 per round trip to most domestic flights. By Thursday afternoon, they were matched by American, Delta and US Airways. Low-cost carriers JetBlue and AirTran had not raised prices, and Southwest had done so only on some routes, according to fare watchers.
Airlines are trying to pass along their cost for jet fuel, which is rising with the surge in oil prices. Oil hit $100 a barrel on Wednesday. It settled around $97 on Thursday.
The major airlines have introduced six broadly based price increases since December and two others aimed at business travelers. There were just two broad hikes in the first 11 months of last year, according to Rick Seaney, CEO of FareCompare.com.
In dollar terms, the biggest price increases — up to $60 per round trip this week alone — have fallen on business travelers. Airlines view leisure travelers as more budget-conscious, so increases in economy class have averaged $5 to $12.
Airlines have been using other tools to raise revenue too, like extra charges for flying on peak travel days during spring break or to popular destinations like the Caribbean.
Jet fuel accounts for roughly a third of airlines' budgets. Fuel prices have increased by about 50 percent in the past year, although airlines have dodged some of the rise by hedging fuel purchases.
Fuel bills threaten to undercut airline profits. In recent weeks, analysts have reduced their forecasts for 2011 profits among U.S. airlines by about $1 billion. Michael Derchin, an airline analyst for CRT Capital Group, said Wednesday that the industry could fall to break-even if jet fuel, which spiked to $3.07 a gallon, reaches and remains at $3.14.
Airline shareholders feel the pain. The stocks plunged Tuesday and Wednesday, wiping out $3.2 billion in shareholder value.
The last big surge in oil prices in 2008 helped send airlines into a 2-year nosedive. They are in much better shape to handle $100-a-barrel oil now, however. They have saved cash, hedged against high fuel costs, and raised ticket prices.
The airlines have helped themselves by limiting the supply of flights and seats for sale, which keeps flights full and airfares higher.
Ray Neidl, an analyst with Maxim Group, said if the economic recovery continues, airlines can pass higher fuel costs to passengers. If the economy slows, he said, travel demand will weaken and "that is when we begin to have problems."
John Heimlich, chief economist of the Air Transport Association, which represents the big U.S. airlines, said the carriers have limited choices. They can cut non-fuel costs, they can upgrade to more fuel-efficient planes — but that takes time and money — or they can raise fares.
As fuel prices rise, Heimlich said, more flights will become unprofitable — and candidates for elimination.
"We will have to cut service, and we would rather not do that," he said.
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