Airlines Find Some Relief

Fare increases meant to offset fuel costs may finally stick.
By Ross Snel ,

At last, an airline industry attempt to offset high, profit-killing fuel prices with a fare hike is holding firm, providing welcome relief.

The increases, which started last week, have gained traction in part because

Northwest Airlines

(NWAC)

-- known as a spoiler in past fare-hike attempts -- helped initiate them this time around.

"They were led by Northwest, which is notorious for not wanting to raise fares in the past," said Helane Becker, airline analyst at The Benchmark Co., a New York-based brokerage.

The industry's increases will bolster airline revenue, which has been under pressure from too much capacity and intense competition from the low-cost carriers. In that environment, airlines also have found themselves unable to pass along fuel costs to their customers, even after crude oil futures hit an all-time high of more than $55 a barrel last October. That inability to pass on costs to customers differentiates airlines from shippers like

UPS

(UPS) - Get Report

and

FedEx

(FDX) - Get Report

. High fuel expenses inflicted a total of $9.5 billion in losses at seven of the top eight U.S. carriers last year.

This time, the price increases are likely to stick in markets in which the traditional network carriers compete, observers said. They could, however, falter in areas where competition is fierce from

Southwest

(LUV) - Get Report

and

JetBlue

(JBLU) - Get Report

, which so far haven't joined in the current round of increases.

Analysts expect major carriers will make so-called carve-outs, pulling back their increases in markets in which they compete with those two carriers.

"Elevated industry fares in JetBlue markets will likely revert to pre-increase/JetBlue levels in the next day or so," wrote J.P. Morgan analyst Jamie Baker in a research note Monday.

That already appears to be happening. On Friday, Northwest withdrew the increase on some fares with which it competes with low-cost carriers, said Kurt Ebenhoch, a Northwest spokesman. It also reversed the increase on some routes in order to compete with

Delta's

(DAL) - Get Report

highest business fares.

America West

(AWA)

also left fares unchanged on a few "select" routes, according to a spokesman.

AMR's

(AMR)

American Airlines kicked off the surcharge Wednesday by increasing fares $5 each way in selected markets.

But Northwest Airlines upped the ante Thursday morning, boosting ticket prices $10 each way on longer flights in the U.S. and Canada and $5 each way on flights shorter than 1,000 miles. Northwest cited higher fuel prices and the approach of peak summer booking season.

After Northwest's move, other big U.S. carriers followed: Delta Air Lines,

Continental

(CAL) - Get Report

and

UAL's

(UALAQ)

United Airlines.

US Airways

(UAIRQ)

largely matched the increase, except on its discount GoFares, which account for 30% of all flights, a spokeswoman said.

Even some discount carriers jumped into the pool, including

AirTran

(AAI)

and America West, although AirTran raised all its fares by only $5 each way.

Not surprisingly, the two holdouts are low-cost heavyweights Southwest and JetBlue. Southwest is known for not joining in industry fare hikes, and a Southwest spokeswoman said Monday morning the carrier had not raised fares. JetBlue did not return a call in time for this story, but other industry participants said the airline had not joined the fare hike by Monday morning.

The latest industry hikes will stick in less-competitive markets that lack low-cost carriers, said Tom Parsons, the chief executive of Bestfares.com, which monitors industry pricing.

"In noncompetitive markets like Dallas-Fort Worth to Syracuse, N.Y., every single air fare took the $10-dollar hit each way," Parsons said. "Not one low-cost carrier flies there."

Southwest fares may rise soon, although perhaps not as much as the latest industry hike. "Southwest typically avoids the fare-increase limelight, choosing instead to spread an increase over smaller initiatives -- usually just a few hundred markets at a time and usually by no more than $3 one-way," wrote J.P. Morgan's Baker. "Southwest's last spurt of activity occurred in October of 2004, prior to which increases occurred roughly every five months or so. We would not be surprised to see Southwest gradually begin raising fares as the summer peak approaches."

A Southwest spokeswoman confirmed that when the airline does raise fares, it typically does so by $2 or $3 each way, depending on a route's length.

Even though the industry will get some welcome added revenue from the hikes, it likely won't be enough to mitigate the pain of oil prices, which are on the rise again. Crude oil futures nudged closer to $52 a barrel Monday and are at their highest levels since late October.

"You have the good event of the fare increase, but it's offset by the negative event of the oil prices," Benchmark's Becker said.

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