Airlines Go Back to Fare-Hike Well

Facing increased cost pressure from skyrocketing oil prices, U.S. airlines have again turned to a tried and true tactic for minimizing the pain — raising fares.  But in the wake of a fare-hike attempt that failed last week, can they make this try stick?  And if not, what other options exist to keep operating costs – and earnings – steady? US Airways (NYSE: LLC ) raised round-trip domestic ticket prices by $10 on Thursday, kicking off the industry's 10 th attempt to raise fares this year.  Delta Air Lines (NYSE: DAL ) reportedly has matched, as have JetBlue (Nasdaq: JBLU ), AirTran (NYSE: AAI ) and Virgin America.  The success of airlines' most recent attempt to pass along higher costs to travelers likely will depend on low-cost leader Southwest (NYSE: LUV ), which put the kibosh on another fare-hike plan a week earlier.  By Friday, the odds weren’t good that Southwest would bless this latest increase. Most airline stocks were down more than 4% and the Guggenheim Airline (NYSE: FAA ) exchange-traded fund was off more than 2.5%. The ETF was off a few pennies on Monday as crude oil retreated back below $112 a barrel. Fare hikes – or at least the attempt — are fast becoming pre-weekend rituals for U.S. airlines.  United Continental (NYSE: UAL ) kicked off the U.S. airline industry's 9 th attempt to raise fares on March 31 with a $10 hike on domestic fares.  The next day, American Airlines parent AMR Corp. (NYSE: AMR ), Delta, JetBlue, US Airways and Alaska Airlines (NYSE: ALK ) followed suit. The proverbial skunk at the garden party was Southwest, which in keeping with its low-cost mantra, refused to match its competitors' fare increases. That started the ball rolling as Delta and American then rolled back their fare hikes.  By April 2, United Continental had surrendered and canceled its fare increases – the second consecutive time that a proposed fare hike has failed. . But prior to the Japan earthquake, tsunami and nuclear emergency on March 11, U.S. airlines had been largely successful in using fare increases to offset higher operating costs that are dominated by fuel.  While the traveling public will be pleased by the fare-hike failures, higher fuel prices are eating airlines' lunch. Using a crude oil price of only $96 a barrel, the International Air Transport Association last month cut the industry's 2011 earnings estimate by $500 million — putting total yearly profit for the global airline industry at a mere $8.6 billion. And here's what's even worse: The IATA says that every dollar increase in the price of a barrel of oil boosts airlines' fuel costs by another $1.6 billion.  Bottom Line: For an airline industry faced with the daunting challenge of fuel cost pressure, fare increases traditionally have been the release valve.  But as competitive pressure from low-cost airlines like Southwest holds fares steady, carriers must seek out other options.  Those options include significant cuts in capacity, elimination of routes, fuel price hedging and the imposition of new fees, all of which airlines are pursuing.  But the bigger question for airlines and their investors is whether those tactics can do enough to keep carriers profitable if fare increases are off the table.  And the answer to that question very likely is "no". As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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