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Airlines raise base fares sharply, still fill planes
By Dan Reed, USA TODAY - 4/12/2006 2:24 AM
Last year, U.S. travelers were feasting on airfares that, on average, were the lowest ever when adjusted for inflation.
No more. Last week, the USA's big airlines tacked $50 onto their unrestricted coach fares in most markets. Few people actually buy those high-end tickets, but most discount fares are set as a percentage of those unrestricted fares. So, such a large jump in those benchmark prices hits the average traveler in the wallet.
That's the most recent in a string of targeted and general fare increases, including a small but telling industrywide increase in early March triggered by Southwest Airlines, the king of the discounters. Taken together, the fare increases have produced a double-digit percentage rise in the cost of the average airline ticket since fall.
Fare prices are likely to go higher still, perhaps a lot higher.
Strong travel demand, plus the airline industry's newfound restraint in adding flying capacity, are giving U.S. carriers greater ability to name their prices than at any time since 2000.
While that means bargains are scarcer and trips costlier, it also means domestic carriers have at least a shot at financial stability, which has eluded them since recession and terrorism in 2001 knocked their business into a depression.
Andrew Winterton, an executive at consultant American Express Business Travel, says airlines have entered a prolonged period of more fare increases, fewer fare sales and low limits on the number of tickets sold at the lowest published price.
"If airlines are going to stay in business, they have to begin pricing for profitability," Winterton says.
Sally Gray, a broadcast equipment saleswoman from Saratoga, Calif., says she was shocked when she tried to book a flight from San Jose, Calif., to Sioux Falls, S.D., at the last minute. She couldn't get a seat for less than $1,050 round trip. "I didn't want to permanently buy the seat, I just wanted to sit in it for a couple of hours," she said. Still, Gray had to go, so she bought the ticket.
The run-up in fares can be calculated in various ways. Among them:
• The average domestic fare paid per mile flown was up 12.5% in February from a year earlier, when fares were the lowest ever in inflation-adjusted terms. A 2,000-mile trip that cost, on average, $229 in February 2005, was up to $258 this past February.
•The price of the typical one-way business fare between Chicago and Washington was $339 in early April, up 71% from a year earlier, according to price-tracker Harrell Associates. The demise in January of discounter Independence Air, based at Washington Dulles, influenced that jump. But the defunct carrier was not a factor on many routes, such as Detroit-Los Angeles, where the business fare was $599 in early April, up 29% from a year earlier.
• A broader sampling of business travel fares done by American Express Business Travel shows that the average one-way business fare rose steadily through most of 2005.
For 329 popular domestic routes, it reached $223 in the October-December quarter, up more than 10% from $202 from the first quarter of the year.
• Southwest Airlines, the giant discounter popular with leisure travelers, pushed its average one-way fare above the psychologically important $100 mark on March 10 when it added $2 to $4 each way to most fares.
It also raised the absolute cap on its fares by $10, to $309 one way.
Turnaround
From the industry perspective, air travel prices are rebounding from a long, deep funk. Average fares — expressed in terms of yield, or cents paid for every mile they flew a passenger — had been on a dangerously downward trend for the airlines throughout 2004.
The bottom fell out with Delta's introduction in January 2005 of "Simplifares," a flatter, lower price structure that other airlines followed, in most cases reluctantly.
At the peak of the airlines' most recent profit cycle in February 1999, the airlines received an average of 15 cents for each mile they flew a passenger. But by February 2005, the big U.S. carriers were getting less than 11.5 cents for each passenger mile flown, off nearly a quarter from the peak.
A ticket for a 2,000-mile round trip that earned carriers an average fare of $293 in February 1999 brought in $229 in February 2005.
Salvation for the airlines began arriving late last summer, and it came from an improbable source: higher fuel prices.
By mid-August last year, jet fuel prices had already risen nearly 50% for the year, to around $80 a barrel. Then the Gulf Coast hurricanes temporarily knocked out a third of the nation's supply of jet fuel and other refined products. Jet fuel prices spiked above $125 a barrel.
For airlines, the frightening run-up in fuel prices had an unexpected positive impact. Out of apparent desperation, carriers gingerly began probing the willingness of customers and competitors to accept small fare increases. Travelers, perhaps softened by their experiences at the gasoline pump, didn't flinch.
Also, No. 4 Northwest, which consistently had scuttled earlier fare increases by refusing to follow, fell in line with competitors' increases. Discount carriers, also feeling the pain, quietly raised fares or reduced the number of seats in their lowest-price categories.
Higher post-Katrina fares marked the industry's first success in five years in pushing through general fare increases.
Mark McLain, chairman of the Air Line Pilots Association unit at Northwest Airlines, says the fuel price shock last summer gave carriers public relations cover to do what labor leaders — and basic economics — had been demanding they do for years: raise prices to try to cover costs.
"From a purely capitalist standpoint, high fuel prices have been good for the (traditional) carriers," McLain says.
Laura Wright, Southwest's chief financial officer, says she's been surprised at how understanding consumers have been and how resilient the U.S. economy is. "With the higher energy prices, the economy overall has stayed stronger than we would have thought," she says.
Peter Belobaba, a researcher at MIT's Department of Aeronautics and Astronautics, calls the dramatic rise in fuel costs a godsend for airlines. Without it, he says, the big airlines might not have tried to push fares so high so fast.
"They had to do something about their prices, or they would not have continued to exist much longer," he says.
After collectively losing more than $40 billion in the last five years, U.S. airlines are widely expected to be profitable in 2007, thanks to higher fares and continued aggressive cost cutting.
Profit possibilities scrutinized
Whether the industry can be profitable for 2006 remains in doubt. Wall Street had been looking for the industry to lose $1 billion to $2 billion this year. But that was before oil rose into the high $60s in the past three weeks.
That adds to airlines' operating costs, but it also gives them more reason to raise prices.
An analysis performed for USA TODAY by Sabre Airline Solutions shows how much economic pressure the airlines are under to get their prices up.
To break even, this year's industrywide average domestic fare — including business and leisure fares — needs to be around $179 one way, or 21% higher than it was in the third quarter of last year, when that average domestic fare was about $148.
"We're only about halfway there, measuring from the third quarter of last year," says Vijay Bathija, a senior principal with the consulting arm of the Sabre Group, operator of the Sabre computer reservations system and online travel seller Travelocity.com.
Based on bookings data (not actual sales), "we think that the average domestic fare right now is only up somewhere between 10% and 13% from the fall."
Whether airlines can successfully push the average price to the break-even point isn't certain, but Bathija says "at the end of the day, they have to get close to that."
Consumers might be feeling the bite, but they're not foregoing air travel in measurable numbers. The average commercial jet flying across the USA these days is fuller than ever.
In January and February, the big carriers reported filling the highest percentage of seats ever for the historically slack travel months: 73.7% and 76.8.%, respectively. For all of 2005, the USA's biggest airlines filled 77% of their seats, a record according to the Air Transport Association (ATA). Last week, most of the big carriers reported record March load factors near or above the 80% mark.
A key factor in keeping flights fuller and fares higher is the industry's success in controlling the number of plane seats travelers have to choose from. Until recently, a huge oversupply of flying capacity — seats — prevented carriers from pricing tickets high enough to cover their costs.
But the big airlines' domestic capacity, measured in available seat miles, rose only 1% in 2005, while the number of domestic flights fell 2.3%.The biggest drop in capacity came in the fourth quarter, and the trend is continuing this year. This summer, the ATA expects industry capacity to be down about 2.6% from last summer.
Gordon Kennedy and his colleagues at a Maryland-based defense contractor are among the few who thus far have begun cutting back on their air travel. They are postponing or consolidating trips, and their company is investing in video and Internet conferencing technology, to reduce employee trips and save money.
"When I budgeted for travel this year, I increased airfare by 25%," says Kennedy, an operations manager who lives in Stone Mountain, Ga. But his overall travel budget didn't grow. "Something had to give. So I'll take 30 trips this year instead of the usual 40."
Timothy Burke, director of global marketing at packaging firm Ampac, says he understands the airlines' economic predicament. Higher fares won't affect his business travel decisions, says Burke, who flies 250,000 miles from his home base in Denver.
"If anything, I wish all airlines could impose increases that would allow them to restore profitability and level the playing field," Burke says. "Everyone deserves to make money, protect jobs and assure the long-term viability of their company."
Similarly, Steven Dobie, a Motorola systems architect from Austin, and a self-described frugal traveler, says his travel will be unaffected. "Air travel is no different than paying higher prices at the grocery store because of increased ... costs," he says.
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