Continental, Northwest Hike Air Fares

Higher fuel costs are cutting into revenue.
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Updated from 11:50 a.m. EST

The high price of oil is hurting the revenue recovery seen by legacy carriers, forcing

Continental Airlines

(CAL) - Get Report

to boost ticket prices effective immediately. But in a surprise,

Northwest Airlines

(NWAC)

has matched the hike in some markets, which could pave the way for higher ticket prices industrywide.

On Friday morning, Continental announced that it would add $10 to all restricted and unrestricted roundtrip fares in the contiguous 48 states, citing high fuel costs as the motivating factor.

"Fuel prices -- which we can't control -- are the highest we have ever seen," said Jeff Misner, CFO, in a statement. "Meanwhile, Continental travelers in 2003 paid the lowest fares since 1994. This fare increase is a step toward matching fares with the cost of providing air travel in this environment."

Early indications show that Northwest matched this price hike in many -- but not all --markets, just after 10 a.m. on Friday. According to Terry Trippler, airline expert at CheapSeats.com, Northwest has been the only carrier to match the fare hike, but more could join in over the weekend.

"The Northwest match is funny. It's in some markets, but not in all," said Trippler, noting that the hike was seen on the cheapest fares, on routes that low-cost carriers serve. "The bottom line is they have matched, but not systemwide. It will be a very fluid situation all weekend, but I would almost bet the rent that this one will stick."

Because of the way fares are entered into the system, it will take a while to see exactly what routes will be affected by hikes and which airlines have participated.

But the fact that Northwest has joined in is significant. Since the World Trade Center attacks two-and-a-half years ago, the industry has attempted to raise fare prices a number of times only to be thwarted when a major carrier refuses to go along with a hike. And Northwest has traditionally been that carrier, refusing to budge.

If the price hikes do go through, it would have an immediate impact on airline earnings, especially for the legacy carriers, where fuel costs account for nearly 15% of total expenses.

Because of their weak balance sheets, the legacy names have been unable to hedge the price of oil, leaving them completely exposed to the vagaries of the open market. Crude oil prices have been above $30 a barrel for much of the last year, and were recently up 28 cents, to $35.61, in New York trading.

And no legacy carriers are more exposed than Continental and Northwest, both of which have zero fuel hedged for 2004. This may be why Northwest has agreed to play along -- but another carrier could emerge as a spoilsport.

Just a month ago,

AMR

(AMR)

, which is the parent of American Airlines and has 21% of its first-quarter fuel needs hedged at $23 a barrel, failed in two separate attempts to institute a fuel surcharge. Of all the legacy names,

Delta Air Lines

(DAL) - Get Report

is the best positioned with 54% of its fuel needs hedged for the first quarter and 32% of fuel hedged for the full year.