Continental Air Boosts Fuel Charge

In the airline industry, if at first you don't succeed, keep trying to raise fares until something sticks.

That's the approach Continental Airlines ( CAL) has been taking lately. On Friday morning, the carrier announced that it was boosting its existing fuel surcharges on roundtrip flights in select markets to $30 from $20, citing the price of crude oil, which hit $38 a barrel a week ago.

"On Chicago to Los Angeles, 18 of Continental's 25 fares now have a $15 surcharge, when previously they had a $10," said Terry Trippler, airline expert and fare tracker at CheapSeats.com. "But I can't find any pattern at all. Continental has never gone by the low-cost carriers, it's the one carrier that seems to take a responsible approach to pricing."

Indeed, Continental has taken the lead with regard to fuel surcharges and Friday's announcement is the latest attempt to offset the inflated price of airline fuel, which is the second-largest cost for airlines, accounting for 12% to 15% of expenses.

The latest fare hike comes on the heels of a Federal Aviation Authority report Thursday saying that passenger traffic, which is a proxy for revenue, would increase 4% in 2004, the first growth seen since 2000. Furthermore, the FAA said that by 2005 the number of passengers flying on planes will finally reach levels seen before the World Trade Center attacks.

On Friday, the Amex Airlines index, which have fallen in four of the last five weeks, was up 3.4% to 54.72, putting it on track to finish higher than 51.99, where it closed a week ago. Continental shares rose 26 cents, or 2.1%, to $12.58.

The airline industry's attempts to raise ticket prices for any reason this year has been spotty, at best. During three of the last five Fridays, one of the legacy carriers has stepped forward to institute a surcharge only to see the effort fail when the hike wasn't matched by every carrier or only matched selectively, which is what Northwest Airlines ( NWAC) has been doing.

By selectively matching on individual routes, the industry is slowly grinding its way towards higher ticket prices, almost a route at a time.

"The other carriers are tiptoeing around the low cost carriers," said Trippler. "I can look every day, and in this market, a fuel surcharge is added to one more fare. The next day, I'll see two more fares. These are the ones that don't make the news."

And it appears to be working. The Department of Labor said that airline fares rose 1.2% in February. While that's still 6.1% lower than the price of a ticket prior to the World Trade Center attacks, the surcharges are sticking especially in markets with a dearth of low-cost competition.

In Canada, airlines have been more successful at raising prices. A week ago, Air Canada, which is operating under bankruptcy protection, boosted fares by as much as $40 per roundtrip because of fuel. The move was matched by WestJet and the surcharges appear to have stuck.

With the price of oil falling from more than $38 a barrel last week to about $35.50 on Thursday, the hikes come at a time when airlines are seeing a bit of relief. And no one can use it more than Continental, mired in a unit revenue slump that has caused Wall Street to nix estimates for a profit in 2004. But persistence appears to be paying off and higher tickets could be a matter of time.

"Right now Continental has laid it out and they're saying, 'This is what we need.' A person only needs to drive by a gas station to see this is a well deserved surcharge," said Trippler.

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