Airlines Try Another Fare Hike

High fuel costs are partly to blame for the move, but previous fare hikes have failed to stick.
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The airline industry, led by

Delta Air Lines

(DAL) - Get Report

Friday, made another attempt to boost ticket prices to offset the high price of fuel. But with low-cost carriers rolling out new service while legacy carriers increase the number of flights, a fare war undermines the industry's ability to increase fares.

Delta boosted the price of a round-trip ticket by $8 to $9 in markets with a connecting flight. By Friday afternoon,

Northwest Airlines

(NWAC)

announced that it was matching Delta in select markets where the two carriers compete. But in order for the fare hike to stick, rivals must all join in -- something that hasn't happened since the World Trade Center attacks 2 1/2 years ago.

Three weeks ago,

Continental Airlines

(CAL) - Get Report

attempted to boost round-trip tickets by $10, with the company complaining oil prices were "the highest we've ever seen." But while most of the legacy carriers matched Continental's hike, including Delta and Northwest in select markets, low-cost carriers didn't join in and the hike was rescinded.

A decade ago, airlines had more pricing power, especially at the high end dominated by the legacy carriers, which could always count on the loyal and lucrative business traveler. But with the Internet exposing the four-figure pricing gap between business class and coach class and low-cost carriers adding more flights, studies show that the business travel has moved away from the legacy carriers, taking pricing premiums with them.

"In past airline industry cyclical downturns, many business travelers traded down to low-fare airlines and quickly traded back up to full-fare major airlines with the first signs of economic recovery," said Kevin Mitchell, spokesman for the Business Travel Coalition, a trade group representing business travelers. "Just like the workers that are not replaced when an industry changes structurally, business travelers are never again going to accept sky-high business fares."

And unlike prior years, they won't have to. While the BTC expects business travel to grow by 4% annually in 2004, Mitchell said that low-cost carriers will account for that growth, continuing to steal market share from legacy carriers and depressing prices.

"Business travelers have been encouraged over a three-year period to use low-fare airlines as a matter of corporate policy, sometimes supported by contracts between low-fare airlines and major corporations," said Mitchell. "Sixty-five percent of companies BTC surveyed in the fourth quarter expected increased use of low-fare airlines in 2004."

Over the last year, low-cost carriers like

JetBlue

(JBLU) - Get Report

,

Southwest

(LUV) - Get Report

and

AirTran

(AAI)

have introduced service on transcontinental routes that were once the bread-and-butter of the legacy carriers. But as the low-cost revolution has spread to longer flights, the amount of revenue airlines can generate per available seat mile, a key metric known as RASM, has been weakening.

On Friday night after the close of trading, the Air Transport Association will release February RASM results, giving investors another peek into the effect prices will have on earnings for the first quarter. With Delta and American Airlines, unit of

AMR

(AMR)

, warning in the last week, analysts are becoming more pessimistic about the industry recovery, with Continental no longer expected to post a profit in 2004 due to slumping RASM.

"We expect RASM to rise a disappointing 4% to 4.5%, driven by continued domestic RASM weakness," said Jamie Baker, analyst at J.P. Morgan. "Given the recent 30% correction in most shares, a RASM figure of this disappointing magnitude is likely incorporated into the stocks already. That said, we believe the RASM figure will likely set off another round of across-the-board estimate cuts."

With the legacy carriers adding back capacity shelved a year ago during the run up to the war in Iraq and low-cost carriers filling out their route structures, the number of flights is on the rise. And with demand still flat, due in part to the state of the economic recovery, analysts are concerned that overcapacity will push prices even lower than they already are.

Ultimately, the major carriers only will be successful in raising prices when the low-cost carriers join in. And while that would help major carriers boost results, it wouldn't help them steal back market share from the low-cost names.

Airline stocks fell, with the Amex Airlines index off 1.8%, led lower by American, down 83 cents, or 6.8%, to $11.32, and Northwest, down 26 cents, or 2.8%, to $8.93. Low-cost carriers bucked the trend, with Southwest up 4 cents, or 0.3%, to $13.59, while AirTran rose 6 cents, or 0.5%, to $11.17.