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 werent 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.
