Airlines' Fare Play - TheStreet

Major airlines played a high-stakes game of chicken Monday that illustrates the difficulty of industry efforts to raise fares to offset skyrocketing fuel costs.

Early Monday afternoon, it appeared that most network carriers and some low-cost airlines -- including

JetBlue Airways

(JBLU) - Get Report

-- jumped on board a round-trip fare hike of $10 that

Continental Airlines

(CAL) - Get Report

had instituted on Friday.

But then

Delta Air Lines

(DAL) - Get Report

rolled back its increase, and Continental quickly followed suit, scuttling major airlines' third fare hike in less than a month.

The latest attempt to raise prices comes after two successful rounds over the past month that together lifted round-trip fares as much as $40. With oil prices setting records again after a roughly 25% retreat from their October peak, airlines have been eager to pass along fuel expenses to customers.

Still, Monday's events show that airlines are quick to back out of fare increases if they think rivals are not playing along.

A Delta spokeswoman said the carrier made the about-face because "We're trying to remain competitive with the rest of the industry." She declined to elaborate.

But Jamie Baker, a J.P. Morgan analyst, said in a research note Monday that Delta may have made a mistake, leaving hope the latest increase would hold. Baker contends that Delta saw

Northwest Airlines

(NWAC)

cancel an overnight stay requirement and incorrectly interpreted it as a cancellation of the fare increase.

"As such, we maintain a high level of confidence that this increase will eventually stick by week's end," Baker wrote. His company, J.P. Morgan, does business and seeks to do business with companies covered in its research reports.

A Northwest representative declined to comment on Delta's move but said Northwest had kept the fare increase in place even after Delta and Continental opted out.

Successful fare hikes will obviously provide some relief to airlines struggling with high fuel costs. The question, though, is whether it'll be enough.

Baker estimates that recent fare increases should roughly equate to a $5-a-barrel decline in crude oil prices. "Clearly a step, though not a leap, in the right direction," he wrote.

But Kimberly Noland, an analyst at bond research company Gimme Credit, said the price of oil, combined with industry fare reform initiated by Delta's Simplifares in January, have a "far greater impact than these attempts at fare hikes."

One noteworthy follower of the latest attempted increase is JetBlue, a low-cost carrier that had been widely viewed as a nonparticipant in such efforts. On Monday, JetBlue lifted its cheapest fares by $5 each way on transcontinental routes, and on flights from Boston and New York to Florida. A spokesman attributed to move the "astronomical" price of fuel, but also to the current competitive environment.

That increase follows one JetBlue made a week ago, lifting fares $4 or $5 one-way on all routes except those to the Caribbean.

JetBlue benefited last year from a significant fuel-hedging program, but it has hedged a smaller percentage of its 2005 needs -- 21% to 22% at $29.95 a barrel -- and has no hedges in place for 2006.

U.S. airlines remain in a bruising environment. Fuel is a key factor, as it constitutes carriers' second-largest expense after labor. Higher oil prices last year helped to account for billions of dollars in losses for the industry. At the same time, a glut of industry capacity, combined with tough competition from discount airlines, has made the raising of fares difficult.

Oil's recent ascent has prompted some analysts to rejigger estimates. Last Friday, for example, Merrill Lynch's Michael Linenberg raised his 2005 crude oil forecast to $51 a barrel from $45. That prompted him to raise his forecast for industry losses for the year to $5 billion from $3.4 billion. Linenberg, whose company does and seeks to do business with companies covered in its research reports, estimates that each $1-a-barrel move in the price of crude equates to a $450 million shift in the industry's pretax profit or loss.