Air Fares Climb as Delta Blinks

The Atlanta-based carrier kept the fare cap as long as it could, but fuel costs became too much.
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Delta Air Lines'

(DAL) - Get Report

decision to raise its highest fares received a warm reception from its rivals, who are hungry for ways to boost revenue in a bruising industry environment.

After Delta Thursday lifted its highest fares by $100 one-way, to $599 on economy tickets and $699 for first class, other carriers quickly jumped on board. By Thursday night,

American Airlines'

parent

AMR

(AMR)

,

Continental

(CAL) - Get Report

,

Northwest Airlines

(NWAC)

,

US Airways

(UAIRQ)

and

UAL's

(UALAQ)

United Airlines had matched Delta's move.

The industry increase on last-minute walk-up fares, typically purchased by business travelers, will certainly boost revenue, analysts say. But the benefit won't come close to offsetting the effect of high oil prices. Nor will it significantly improve the odds that Delta will be able to avoid bankruptcy.

Delta's relaxing of its fare cap will likely boost industry revenue by about $300 million, estimates Helane Becker, airline analyst at the Benchmark Co., a New York-based brokerage that does no business with the companies it covers. While not insignificant, that amount is far less than the $2 billion in added fuel expenses Becker expects the industry to incur this year.

Crude oil futures remain near the $60 level after hitting a record close of $61.28 earlier this month. Even though the industry has aggressively slashed costs, oil's ascent has put it on track to lose a total of roughly $4.8 billion this year, according to Ray Neidl, an analyst at Calyon Securities, a firm that does and seeks to do business with companies its analysts cover.

Costs of Crude

Delta, which had previously voiced determination to maintain the fare cap put in place as part of its January Simplifares initiative, said fuel costs forced its hand. "When Delta launched Simplifares in January, crude oil was selling at $43 a barrel compared to as much as $61 per barrel in recent weeks," says Paul Matsen, the airline's chief marketing officer. "Despite our best intentions to keep the current fare caps in place, we have been forced to find ways to offset this dramatic spike in costs."

Delta's fare simplification program and price cap are part of an ambitious restructuring plan aimed at averting bankruptcy. The nation's No. 3 carrier said lower maximum fares, along with fewer restrictions on purchases, would help it win back business lost to aggressive discounters such as

JetBlue Airways

(JBLU) - Get Report

.

But oil's price surge has swamped Delta's turnaround efforts. The airline has warned it could face a cash crunch later this year and said bankruptcy could be on the horizon if lawmakers don't give it and other carriers more time to fund traditional pension plans.

Delta's revenue will probably gain $80 million a year from the increase in its highest fares, an amount "insufficient to materially affect its Chapter 11 probability," J.P. Morgan analyst Jamie Baker wrote in a research note.

The roughly $300 million-a-year industry benefit from Delta's raising of its fare cap fails to offset the $1 billion in lost annual industry revenue resulting from the overall Simplifares program, estimates Benchmark's Becker.

Posting Profits?

The analyst contends Delta could help the industry regain about $500 million of revenue if it were to undo Simplifares' cancellation of the two-night minimum stay requirement.

At least one other carrier, Northwest, recently tried in vain to reinstate that requirement on some fares, but Delta resisted.

In the past, airlines used the two-night minimum to charge business travelers more. That's because many business travelers only needed a day or two for their meetings. By requiring at least a two-night stay on cheaper tickets, airlines were able to nudge business travelers to purchase more expensive tickets that don't carry the two-night restriction. Delta's scrapping of the requirement allowed business travelers to enjoy cheaper fares typically bought by leisure travelers, who tend to stay more than two nights at destinations.

The impact of the industry's latest fare move won't be felt in the second-quarter results, but a string of other fare hikes -- along with strong passenger traffic -- likely boosted industry revenue during the period and put some network carriers in the black for the quarter.

Investors will get a slew of earnings reports next week, with AMR and Continental reporting before the bell Wednesday, followed by

Alaska Air Group

(ALK) - Get Report

,

America West

(AWA)

, Delta and JetBlue on Thursday.

Low-cost carrier JetBlue is expected to continue its profitability streak, but analysts also believe Continental, Alaska, and maybe even AMR and America West, will report profits.

On Thursday, Southwest kicked off earnings season by reporting a better-than-expected profit of 20 cents a share. The airline continued to benefit from an aggressive fuel hedging program that capped most of its fuel needs well below current market prices.