Airlines around the world are raising airfares and/or increasing fuel surcharges to offset crippling jet fuel costs. In the United States, carriers also have added fees for various services and conveniences, including confirmed window or aisle seats, ticket changes on nonrefundable fares and checking more than one bag. Airline executives said more passenger charges are in the works and additional airfare hikes should be expected.
"Based on where we sit today, we are nowhere near recovering this extraordinary increase in fuel cost," said Gerard Arpey, CEO of American Airlines parent AMR Corp., during the company's first quarter earnings conference call this month. [AMR lost $328 million.]
"There is no investment case for a business that is seeing its annual costs rise at about $1 million per hour," according to a research note from UBS analyst Kevin Crissey. "That is what AMR has faced in fuel costs so far this year. Capacity cuts and consolidation won't nearly offset this impact."
To help drive more revenue, American this week followed most of its competitors in instituting a $25 fee for most customers who check a second piece of baggage. The policy takes effect May 12.
JetBlue Airways wanted to avoid charging for a second bag but evidently had little choice. "In most of the third-party distribution channels [including global distribution systems], the decision-making is comparing based on fare," said JetBlue vice president of sales Noreen Courtney-Wilds, speaking this month at the Travel Industry Association's TravelCom08 conference. "If you're someone traveling with two bags, there is now a difference in what you'll pay and that doesn't reflect in the fare. We know that if we don't match fares, we'll see bookings decline. That's really troublesome for us."
As a result, JetBlue partially matched by applying a $20 charge for a second checked bag. "Our goal is not to be competitively disadvantaged," said CEO Dave Barger. "However, at the same time, we don't want to nickel and dime our customers. We strive to strike a balance."
United Airlines, which was first out with the bag fee, is seeking to add more passenger charges, potentially including fees for seat assignments and other "unbundled" product and service pricing. "Given the magnitude of the challenge, the second bag fee is just the tip of the iceberg," said chief revenue officer John Tague. "If we have a fee, we'll evaluate raising it."
For example, "We adjusted our [domestic] ticket change fee from $100 to $150," Tague explained. "This is part of a basket of fee changes" from which United expects to generate $250 million annually.
Change fees applied to nonrefundable tickets are of particular note for corporate travelers whose companies ask them to book the lowest available airfare, which oftentimes is in a nonrefundable fare class.
United's change fee move has drawn a partial competitive match. "Effective April 24, we raised the change fee (on fares that have a change fee) from $100 to $150 in domestic markets," according to a Continental Airlines spokesperson. US Airways also now charges $150 to change a nonrefundable ticket.
American and Northwest representatives said those carriers' nonrefundable change fees remain at $100. For domestic, nonrefundable fares bought on or after April 1, Delta raised to $100 from $75 its administrative service charge, which applies to reissues, cancellations and exchanges.
Meanwhile, US Airways on May 7 will begin charging "as little as $5" to reserve certain aisle or window seats in economy class for certain flights. Available first through the carrier's Web site, the new upsell option accounts for "approximately 8 percent of all seat assignments in the coach cabin."
Other carriers, including Northwest Airlines, have sold preferential seating at a premium. JetBlue, for example, now offers seats with a few extra inches of legroom for an added fee "as low as $10." Customers can book those seats via the airline's direct Internet and telephone channels. "Technological reasons" currently prevent JetBlue customers from choosing the extra legroom option when booking through global distribution channels, including travel agencies and certain corporate booking tools, according to a spokesperson, "but that is something we'd like to consider."
As airlines uncover incremental revenue streams and work to segment business travelers by reinstituting such mechanisms as Saturday night stay requirements, they also are raising published fares.
The most recent price hike came this week and was initiated by Delta Air Lines across much of its domestic system, according to FareCompare's Rick Seaney. "The increase--in the form of a fuel surcharge--is from $10 to $40 roundtrip, depending on the type of airfare and city pair," according to Seaney, who noted that United matched. "This means travel between some city pairs will include a whopping $110 roundtrip fuel surcharge."
This week's fare hike--the 14th attempted this year--followed a successful price increase last week. That move, led by United and matched by most major network competitors, raised fares by "2 percent to 5 percent ($4 to $70) roundtrip," according to Seaney.
At Southwest, "are we of a mind to increase fares?" asked Gary Kelly, speaking this month with analysts. "We have to. We had two fare increases within the last week and we have to look for opportunities to do more." A Southwest fare increase ranging from $3 to $10 each way takes effect June 13 and is scheduled to run through Aug. 17.
Another "low-cost carrier," AirTran, recently raised fares a few times and "in the second and third quarters, you'll see our average fares go up," said CEO Bob Fornaro. "There is plenty of room in the fare structure now."
JetBlue in the first quarter of 2008 recorded its highest monthly average fare, $138. "It wasn't that long ago that we had an average transcon fare of $299," added Barger. "And now we're into the $500s."
Meanwhile, US Airways established minimum ticket prices in an effort to offset fuel costs. "For example, for flights less than 500 miles, the airline is no longer offering non-sale one-way fares that are less than $69," according to a US Airways statement. "Similar adjustments have also been made for longer haul flights."
JPMorgan Securities analyst Jamie Baker welcomed the move. "In fact, with jet kero at $3.50/gallon, we would suggest that no one-way fare below $99 ever be allowed to exist--including sales," he wrote in a research note, "though we realize this would eliminate a significant portion of Southwest's overall fare spectrum. And therein lies the problem."
Outside the United States, several airlines recently raised ticket surcharges to offset fuel costs, including Air France, British Airways, Japan Airlines and Thai Airways. Qantas Airways increased international published fares by 3 percent.