Fare Hikes Follow Airfare Reform

A modest airfare hike initiated last month by Northwest Airlines was matched by most major and a few smaller competitors around the domestic market, indicating the potential for a revenue rebound after airfare reform earlier this year pushed down published fare levels and, in many cases, average fares paid by corporations.

Northwest cited high fuel prices and the beginning of "the historically strong travel period" for the pricing action, which bumped up all North American one-way fares $5 on flights under 1,000 miles and $10 on longer flights.

From the airline perspective, higher fares will help offset prolonged periods of high crude oil prices. Last week, crude oil peaked above $55 per barrel on the New York Mercantile Exchange. Higher fares also will help strengthen revenue trends as the industry continues to suffer from excess capacity.

In addition to the successful fare hike, there are other minor indicators of a slowly improving revenue environment. Industrywide revenue per available seat mile in January rose in the domestic market and across the entire system after several consecutive monthly declines, according to the Air Transport Association. In an early sign of February performance, Continental Airlines said mainline passenger RASM rose 2 percent to 3 percent, year over year.

"Perhaps mimicking the domestic pricing philosophy of low-cost carriers and improving the value proposition of business travel through reasonable fares isn't as stupid as recently suggested by one airline management," said J.P. Morgan Securities analyst Jamie Baker.

Baker was referring to recent substantial changes to the domestic fare structure, which some analysts now say came with an overstated impact. "The street has been too dour about first-quarter 2005 revenue," said UBS analyst Robert Ashcroft. "Fare reform will ultimately be a good thing for the legacy majors, but how fast that's true depends on getting enough additional people willing to pay the cheaper expensive fares to push inexpensive seats off the airplane."

At least initially, fare reform has contributed to lower average domestic prices. A report issued last week by the National Business Travel Association and conducted by Travel Analytics showed published one-way airfares in the domestic market on average fell 7 percent, or $20, to $266, between late December and early February. When adjusting for effective price changes "by assuming travelers will take advantage of the looser restrictions and buy farther down the fare ladder," the average, adjusted one-way fell fare 17 percent across the six major network carriers.

Specific study findings showed the nominal fare index—a formula used to derive an average number within each carrier's fare booking classes—dropped most at American and Delta, 11 percent in each case. An index reduction of less than 1 percent at US Airways was smallest among the six studied carriers, in part because US Airways had reduced fare levels in many markets prior to Dec. 29. The nominal fare index of the other three network carriers showed decreases between 3 percent and 6 percent.

Taking into account assumed changes in business traveler purchasing habits, effective price changes were more pronounced (see chart above), ranging from a 23 percent drop at Delta and a 21 percent drop at American to a 7 percent drop at US Airways.

The study examined changes to average fares in specific booking classes—walk-up Y fares generally decreased, though only marginally at some carriers—and determined airfare compression thus far has been modest. Comparing the minimum Y class fare with the minimum discounted fare per city pair showed a 5.3 ratio across all six carriers in late December and 4.8 ratio in early February.

WorldTravel BTI also produced data indicating airfare declines for its roster of corporate clients in the early part of 2005.

In comparing pricing from the six major carriers in the last week of January 2005 to the same week in January 2004, the travel management company said average fare paid dropped most at American and Continental, 15 percent in each case. Both Delta and US Airways had double-digit declines while Northwest's was smallest at 2 percent.

In all cases, year-over-year price reductions were less dramatic in late January than in mid-January, "reflecting significant differences in just a two-week timeframe," according to WorldTravel BTI. "The next six months are expected to yield further airfare fluctuations as adjusted discount amendments and additional low-fare programs are implemented."