Fuel Costs Trump Delta Fare Cap

Citing skyrocketing fuel costs, Delta Air Lines (DAL) is relaxing a controversial fare cap it established early this year.

The move may irritate customers who expected the airline to stand firm on the pricing initiative, which cut some fares in half. But it's likely to bolster revenue for the Atlanta-based airline and its rivals, something investors like.

Delta shares jumped as much as 13% on the news and recently traded up 29 cents, or 8.4%, at $3.73. Other airline stocks surged, too, lifting the Amex Airline Index by 4.5% in a rally that also likely benefited from Thursday's decline in crude oil futures.

American Airlines' parent AMR (AMR) gained 68 cents, or 5.3%, to $13.47; Continental (CAL) rose 58 cents, or 3.9%, to $15.34; and Northwest Airlines (NWAC) increased 23 cents, or 4.9%, to $4.92.

Delta, the nation's No. 3 carrier, had hoped to stick with its original Simplifares plan, which capped one-way fares at $499 in economy class and $599 in first class. The ceiling primarily affected last-minute walkup purchases common among business travelers.

Surging fuel costs have forced Delta to change course, however, and it's raising the cap by $100.

"When Delta launched Simplifares in January, crude oil was selling at $43 a barrel compared to as much as $61 per barrel in recent weeks," says Paul Matsen, the airline's chief marketing officer. "Despite our best intentions to keep the current fare caps in place, we have been forced to find ways to offset this dramatic spike in costs. As we continue to transform, Delta remains committed to providing our customers a simple, affordable pricing structure with fewer restrictions -- the guiding principles of Simplifares."

Other aspects of Simplifares remain in place, including the lack of a Saturday-night stay requirement.

The airline has warned it could face a cash crunch later this year and said bankruptcy could be on the horizon if lawmakers don't give it and other carriers more time to fund their traditional pension plans.

Since February, major carriers have benefited from a string of fare increases aimed at offsetting fuel costs. But those increases affected fares that were below the Simplifares cap. As fuel costs continued to rise, rivals like Northwest unsuccessfully challenged Delta to breach it.

"With oil at $60 a barrel and over, something had to give, and today it did," says Terry Trippler, the in-house airline expert at the travel company 1-800-CheapSeats and a longtime observer of industry trends. "When Delta instituted their Simplifares in January, no one envisioned oil at $60 a barrel. Will the other legacy carriers match this increase? You can almost 'bet the rent' on this one, and that it will be done yet today or tonight."

Earlier Thursday, low-cost airline Southwest (LUV) reported stronger-than-expected earnings as it reduced nonfuel costs. Unlike most other major carriers, Southwest also benefits from an aggressive fuel-hedging program that limits its exposure to high fuel prices.

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