Travelers May Soon Rebel Against Higher Fares

[Gerald A]

May 7, 2008

The march of oil prices to record highs is causing unrelenting pain for US airlines, whose attempts to balance their fuel bills through fare increases may soon meet stubborn resistance from customers.

NYMEX crude notched a record high above USD$122 a barrel on Tuesday, spotlighting a crisis that left no major airline unpunished in the first quarter, when the largest carriers reported massive losses.

Carriers such as American Airlines and United Airlines have tried to cope by raising ticket prices, mainly on domestic routes. The fare increases help, but experts say there is a limit to how much travelers will pay for a plane ticket.

"If (oil) really does shoot up to USD$130, USD$140, USD$150, there's really no way that airlines can raise prices high enough to cover that cost because consumers are going to push back more quickly than they are right now," said Rick Seaney, chief executive of airline ticket researcher FareCompare.

FareCompare data show airlines have tried to raise fares and fuel surcharges in domestic markets 13 times this year. Nine of those initiatives were broadly matched throughout the industry. Fare increases last only when they receive industry-wide support.

In an effort to perpetuate the trend toward higher fares, airlines have been pulling in their growth plans and cutting their capacity on domestic routes. Capacity cuts pave the way for higher fares.

In April United's capacity on North American routes fell 6.5 percent from the year-ago period. Continental Airlines trimmed its domestic capacity by 2.9 percent in April.

Some experts believe that mergers in the airline industry may result in capacity cuts and higher fares.

A merger proposal issued last month by Delta Air Lines and Northwest Airlines currently features no capacity cuts. But a possible merger of United and US Airways -- the two carriers are deep in merger talks, according to sources close to the matter -- could by some estimates lead to a 25 percent reduction in the combined capacity of the two carriers.

Seaney said it won't be long before leisure travelers start canceling vacations and business travelers start scrapping travel plans and relying on video conferences.

Data from online travel agency Travelocity show the average fare now paid for travel is 12.2 percent higher than it was a year ago. Meanwhile, the price of oil, which effectively sets the price of jet fuel, has risen 90 percent since last May.

The fare increases have been almost entirely on domestic routes, where the overall year-over-year increase amounts to 16.4 percent, Travelocity said.

So far, demand for travel has not waned due to rising fares, said Amy Ziff, who edits Travelocity's Window Seat travel blog.

"Signs of a strong summer are here. People are absorbing those hikes. What's the threshold? I'm not sure we're at it." Ziff said.

She added, however, that leisure travelers have begun to rethink their travel plans -- opting for shorter trips to less popular locations -- in hopes of finding cheaper air fares.

In addition to rising fares, air travelers also face an avalanche of new fees for items and services that used to be complimentary.

As of last week all the major airlines had initiated a USD$25 fee to check a second bag. The measure sparked controversy among the traveling public.

Such initiatives, however, are crucial to survival in the increasingly hostile airline industry, said Terry Trippler, travel expert at TripplerTravel. Trippler predicts even more such fees. Low-cost carrier Spirit Airlines, for example, already charges to check a single bag.

"It's not going to be you get what you pay for. It's going to be you pay for everything you want," he said.

"(Airlines) will do everything they can, and they have no alternative with oil at USD$120 a barrel."

(Reuters)

Gerald