Raising airfares gets harder

The Baltimore Sun

ATLANTA -- After successfully raising fares more than a dozen times last year, airlines are meeting more resistance this year from consumers and rival carriers.

Last week, Delta Air Lines boosted thousands of fares by $10 a round-trip, and most big network rivals matched the increase. Yesterday, analysts were watching to see whether another boost by United Airlines would stick.

But even if it does, the airlines' record on such across-the-board increases will be a tepid four for nine in 2007, according to J.P. Morgan Securities analyst Jamie Baker.

That compares with about 15 general increases in 2006, as airlines achieved a rare unity in the face of higher fuel costs. Historically, the industry has had trouble passing along higher costs via fares, because if just one significant competitor doesn't go along, fare increases collapse.

Airlines "pretty much had a banner year last year," said Rick Seaney, chief executive of FareCompare.com, a Dallas-based consulting firm that tracks fare trends. This year, airlines have had a harder time getting price increases to hold because of softening demand, he said.

"I think ... a lot of people are driving, even with the higher gas prices," Seaney said.

Because of the series of 2006 boosts, fares are close to their highest levels since 2000, said Richard Leonard, who tracks airline price trends for the U.S. Department of Transportation's Bureau of Transportation Statistics.

The average fare in the 100 largest U.S. markets was $389 in the last quarter of 2006, up 3.4 percent compared with a year earlier, according to the latest DOT data available.

Delta's domestic fares rose at a faster clip - up 8.7 percent compared with last year - because it was one of the last carriers to make big capacity cuts in bankruptcy, say the experts. Reduced capacity allows higher pricing, since seats are fewer.

Meanwhile, Delta has shifted more of its focus to overseas routes, where fares are higher.

"They're making their big money overseas," Leonard said. Despite the weak dollar, delays getting passports and other problems affecting overseas travelers, "I've never seen such sustained international demand in my lifetime," he said.

But there are growing signs - such as the failed fare increases this year - that the industry is hitting some head winds on the domestic front.

Big network airlines' fares on U.S. routes have been falling in recent months, according to the Air Transport Association.

Domestic tickets in May were down 1.5 percent compared with a year earlier, in terms of passenger yields, or the price paid to fly one mile, according to the trade group. Last summer and spring, yields were rising at double-digit rates.

The price of jet fuel, often airlines' biggest expense, has topped $2 a gallon for nearly three months, mirroring previous peaks in 2006 and 2005.

Companies may be winning bigger price cuts off the published business fares. Business Travel News, a trade publication, reported last month that corporate travel managers are negotiating deeper discounts.

In a report last week prompted by Delta's fare increase, Baker, the analyst, said such market pressures are why he doesn't put much stock in recent fare increases.

"Raising asking prices hasn't translated into raising paid prices," he said.

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