Is Fare-Stickler Northwest Helping or Hurting the Sector?

"Northwest is generally the stickler on these things," said Michael Boult, COO of eCLIPSE Advisors, which advises corporations on their travel needs. "I've spoken with them about this, and their philosophy seems to be that they'd like to see the coach-wide fares drop before going along with price increases at higher price points. Otherwise, they're gonna squash the increases."

Ultimately, the airlines got some measure of relief this week -- but not from Continental's ticket increase. On Tuesday, after the fare increase had completely faltered, American Trans Air, the low-cost unit of ATA Holdings (ATAH Quote), announced that it would charge $3 each way to cover rising fuel costs. Most carriers, including Northwest, followed suit.

The $6-per-round-trip charge will certainly help the industry, but a lingering question remains: Is Northwest cutting off the industry's nose, taking away the ability to raise prices, to spite its own face?

Maybe not. While higher ticket prices could help the top line, there's no guarantee that higher ticket prices will automatically boost revenue. In fact, with travel demand so slack at the moment, carriers are just as reliant on volume as they are on price. A price hike could backfire, further reducing demand, to the point where airlines could have made more money with cheaper fares.

"There are actually a few different components to this," said David Swierenga, economist at the Air Transport Association, which tracks the airline industry. "If the business traveler and their corporation aren't not doing well, they will have constrained their travel budget. So if prices go up, they're not spending more, they're just traveling less."

And it's not just business class; Swierenga says that leisure travelers are even more sensitive to price shifts. "If a family wants to take a vacation and prices are high, instead of going to Hawaii, they'll go to Florida. They'll still take a vacation, but they'll spend less. It may seem counterintuitive about raising prices, but it can actually reduce revenue."