Low-Fare Carriers Rethink Ticket Prices

Executives from JetBlue and Southwest say fares need to rise.
Author:
Publish date:

Executives from two of the nation's leading low-fare airlines said Wednesday that fares need to increase in the face of higher fuel costs.

"We need a higher average fare for our tickets," said David Neeleman, CEO of

JetBlue Airways

(JBLU) - Get Report

, at the JP Morgan transportation conference. "We need to get another five bucks or 10 bucks. We are running an airline pretending that oil was going to be $50 a barrel."

Meanwhile,

Southwest Airlines'

(LUV) - Get Report

Chief Financial Officer Laura Wright said her company's revenue has to rise, although the airline's extensive fuel-hedging program provides a cushion against the need for immediate ticket-price increases.

In recent months, every U.S. airline has reported improving revenue trends thanks to higher ticket prices, but most carriers, with the exception of Southwest, remain unprofitable. Because the low-fare carriers tend to set industry pricing, their commitment to higher ticket prices is a positive sign for the other airlines, depending on the pace at which increases are implemented.

Neeleman said JetBlue has "left money on the table" in pricing and suggested that ticket-price adjustments could be made by improved revenue management, perhaps by adding more "fare buckets," or fare categories. However, that notion goes against the simplified pricing structure generally advocated by low-fare carriers.

"The whole fare thing has to be rethought," Neeleman said. "Our customers will pay us a little bit more money. They love JetBlue. We just have to ask for it."

He cited the example of JetBlue's New York-Florida fares in January and said prices were probably too high on the top end and too low on the bottom end. JetBlue's average fare for New York-Florida flights was about $94 or $95, he said, which likely involved selling a lot of $69 tickets as well as a number of $299 tickets. "We should have had more $129's and $139's," he said.

Fares could also rise this summer in the transcontinental markets from New York, where JetBlue is a leading figure. Neeleman noted that capacity in the market is down this year, with the reduction in the high single digits. Last year, he said, JetBlue had 92% load factors in those markets. "We could have gotten more money,

and we will get more money this year," he said.

Meanwhile, Wright said Southwest has 75% of its first-quarter fuel hedged at $36 a barrel, but added that fuel costs are nevertheless expected to rise 60% year over year. The airline's fuel hedge position will decline gradually over the next four to five years.

"The hedge positions that we have give us some time to adjust both the revenue and the cost structure so that we can have a

business model that can support $60

for fuel," Wright said. "We are working very hard on the cost structure, but we're pretty lean, and you can't get there on the cost side alone."

She noted that Southwest's preference has historically been to gradually increase ticket prices, rather than to take a single larger step.