Airlines, Now Flush, Fear a Downturn
By JAD MOUAWAD
New York Times
June 10, 2011
So far this year, the airlines have been able to repeatedly raise ticket prices while still filling their planes. It has been a lucrative formula.
But with the economy slowing down again, the stock market sputtering and high oil prices cutting into household budgets, the airlines may be harder pressed to keep their fares up and planes packed, at least without resorting to significant cuts in capacity when the summer vacation season is over.
Some warning signs are already there. The airlines have failed to raise fares in six of their seven efforts since March, suggesting that some passengers may be balking at the higher ticket prices. “Airlines have overreached,” said George Hobica, the founder of AirFareWatchdog.com.
Still, the airlines’ aggressive pricing strategy has worked well for them. Every major airline has managed to squeeze more revenue out of its passengers this year, thanks not just to higher fares but also to a growing multitude of fees. In May, for instance, United Continental Holdings reported that its estimated revenue per passenger was 14 to 15 percent higher than a year ago, while Southwest Airlines said that measure had risen 11 to 12 percent.
It has not hurt that mergers have left fewer airlines and that they have taken a more disciplined approach to controlling capacity.
For the summer, traditionally the busiest air travel season of the year, demand for airline seats remains strong. The Air Transport Association, the airline trade group, expects 206 million people will fly in June through August, an increase of 1.5 percent over last year. The association even expects the number of passengers on international flights this summer to break last year’s record.
Fares, meanwhile, are at the highest seen since their peak in the third quarter of 2008, when the financial crisis hit, according to statistics compiled by the Department of Transportation.
While fares change daily, the cheapest nonstop round-trip flight from New York to Las Vegas for the July 4 weekend was selling on Friday for $597. The cheapest flight from San Francisco to Boston and back, operated by United Airlines, was selling for $664, but that included one stop. Southwest Airlines was charging $703.80 for the trip, and that was with a stop in both directions. A week in Paris is also expensive — with round-trip fares for nonstop flights starting at $1,442 on American Airlines out of New York.
And these figures do not count the extra fees the airlines now charge, for everything from checked bags to priority boarding to reservation changes or fuel surcharges in international flights.
“It’s getting ridiculously expensive,” said Kevin Currie, a representative with the Teamsters union, who said he might soon curtail visits to relatives in Florida if ticket prices kept rising. “There are more people flying right now, so shouldn’t their prices go down?”
Of course, the airlines do not think that way. Since more passengers are vying for every available seat, they can keep raising fares and still fill their planes.
But there are cheaper fares to be had. Mr. Hobica, of AirFareWatchdog.com, noted that travelers could still buy a $280 round-trip fare between Newark and Los Angeles between July 3 and July 11, for example. “If you are willing to be flexible, there are deals.”
Steven Tilston, the senior director for analysis at Expedia, an online travel agent, agreed. “Flights are getting a little more expensive but that is not happening uniformly.”
Given the steeper fares, some travelers may be tempted to drive instead, despite the rise in gasoline prices. One Web site, BeFrugal.com, developed an online application that helps travelers compute the total cost of flying versus the time needed to drive between any cities.
The Web site calculates that it would take four hours and 50 minutes to get from a specific location in Salt Lake City to downtown Los Angeles by air, and cost $762, including cab fares along the way. The same trip could be made by driving about 11 hours for a total round-trip cost of $292.
This certainly has not been an easy year for the airlines. While air travel has recovered from the recession, fuel prices have surged this year. In addition, the earthquake and tsunami in Japan and the instability in the Middle East cut travel to those places. As a result, the International Air Transport Association slashed its forecast for the global industry’s profitability this week. The global trade group said it expected airline profits to fall sharply this year. Profits for North American carriers will drop to $1.2 billion this year, from $4.1 billion last year, the group said.
Nicholas E. Calio, the president of the Air Transport Association, the trade group for United States carriers, voiced a similar concern. The association said that in the first quarter of the year, domestic airlines spent $11.4 billion on fuel, a 30 percent increase from the same period in 2010.
“Even as demand for air travel continues to improve, high and volatile energy prices could hamper recovery efforts,” Mr. Calio said.
Still, the airlines have long been adept at fine-tuning their fares to maximize revenue on each flight. Ray Neidl, a senior aerospace specialist at Maxim Group, an institutional brokerage firm in New York, said he expected that flights would be packed through the summer but that the airlines might have to make some major adjustments in the fall.
“This is the first cycle I have ever seen where the airline industry has had strong discipline in controlling capacity,” Mr. Neidl said.
The airlines have already anticipated a drop in demand in the fall and have started to take steps to curb their capacity by the end of the year.
Delta, Air France KLM, and Alitalia, which operate a joint venture on flights between the United States and Europe, said they planned to slash the seats they offer by as much as 9 percent after the summer.
In the meantime, the numbers remain strong for the airlines. Delta said this week that passenger traffic in May rose by 2.2 percent compared with last year while its load factor — or the percentage of seats that are filled — was nearly 84 percent. On American Airlines, the load factor on domestic flights was 86 percent in May.
Tim Winship, the publisher of FrequentFlyer.com, said such numbers were a sharp shift for the industry, which only a few years ago was satisfied with filling 65 to 75 percent of seats.
“Be prepared to confront your own claustrophobia when flying this summer, because it is going to be congested,” Mr. Winship said. “This is going to translate directly into high levels of discomfort for customers. If you are thinking of having an empty middle seat on your flights this summer, the odds are very good that you will be disappointed.”
Ask Liz Elder, who stepped off a flight from Salt Lake City to visit one of her sons in New York recently. It was her fifth time flying since February. “Every flight I’ve been on this year has been absolutely packed,” she said. “Planes are absolutely stuffed.”
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