Fuel Costs Drive Domestic Fare Growth
Domestic airlines aggressively hiked airfares in the second half of 2007, and airfare analysts expect the trend to continue in 2008. As tightened capacity has kept the supply-and-demand equation in domestic carriers' favor, and the surging cost of fuel puts further pressure on airlines to raise prices, there seems little relief in store for corporate travelers this year.
According the Bureau of Travel Statistics Air Travel Price Index, airfare pricing actually was lower in the first half of 2007 than in the same period in 2006. Though BTS has yet to release full-year fare data, they most certainly came up in the second half of the year, according to airfare analyst and CEO of FareCompare Rick Seaney.
"It's been kind of brutal the last four or five months with the cost of fuel going up," according to Seaney. "We've seen close to 12 increase attempts since Labor Day weekend in 2007, with nine of them being mostly sticky. We're just off the first increase from United Airlines for the year." United Airlines rang in the new year with a $5 to $10 one-way increase on many of its routes, and legacy competitors quickly matched the increase, citing growing fuel expenses.
Though oil prices have retreated from the $100-plus high that started the year, they remain well above the historical average and serve as the primary driver for fare increases.
By JP Morgan airline analyst Jamie Baker's calculations, each $10 per-barrel increase in oil "necessitates an $18 per-passenger increase in revenue," assuming a constant passenger count.
Also growing in prominence are fuel surcharges. Once reserved for long-haul international flights, they increasingly are appearing—and growing—in the domestic market.
Several domestic carriers recently instituted or raised domestic fuel surcharges. FareCompare this month said United initiated a $50 roundtrip fuel surcharge on most of its flights. Though many legacy carriers matched the increase, the effort ultimately failed to take hold, and United rescinded. However, FareCompare on its Web site said the fuel surcharge was "unprecedented" in its cost, since most fuel surcharges eke up $5 or $10 at a time.
However, Seaney said the net effect is the same as a fare hike and is included in FareCompare's overall analysis.
"There's no difference between fuel surcharges and base fare increases. Calling it a fuel surcharge is simply a marketing strategy. It's part of the base fare. People know that fuel is up and therefore the airlines call it a fuel surcharge—it's a fare hike," Seaney said.
While many airlines test the market by filing for fare increases, only to rescind them when competitors do not match, the industry has had an easier time making hikes stick in recent months.
Although Southwest Airlines sat out on the most recent round of fare and fuel surcharge increases, according to FareCompare data, the carrier no longer plays as prominent a role in the success or failure of fare hikes.
"They played the role of the spoiler when it came to pricing in general, but I don't think they have as much say in an overall price increase," FareCompare's Seaney said. "Up until the summer of 2007, there were several times when Southwest didn't come along and it basically spoiled the increase. Even in 2006, Southwest and to some degree AirTran and some others spoiled a lot of increases because they didn't come along. However, with the kind of load factors we're seeing now, the legacy airlines don't care as much because they're still filling up their planes."
Seaney said that he expects to see up to three more successful fare increases in the first quarter—the brunt of which business travelers and smaller cities are likely to bear.
"From a business travel standpoint, it can only get more expensive," he said.