Airlines, Corps. Clash On Fares

<B> Airlines, Corps. Clash On Fares</B>

By Jay Campbell

Following two across-the-board business fare increases on Feb. 1 and March 15, the airlines already this year have pushed prices up by 5 percent--and insiders expect more to come.

The instigator of the most recent attempt to raise prices two weeks ago was Continental Airlines. "We believe fare increases are warranted and sooner or later they will happen," said chairman and CEO Gordon Bethune last week. "The traffic is there."

In the airlines' defense, these increases come after 18 months of flat rates (<I>BTN,</I> July 20, 1998). "The airlines in 1996 were aggressive on fare increases, in 1997 somewhat aggressive, and in 1998 more passive," said Bob Harrell, a consultant to American Express. "My sense is that they are now a bit less timid about raising fares because of the Department of Transportation's 'jawboning' last year. The government pressure on airlines seems to have moved from pricing to service. Also, last year, Northwest blocked a lot of increases due to its labor disputes."

Harrell pointed out that while the airlines typically cite fuel price increases as the reason for rising fares, the Air Transport Association's latest figures indicate jet fuel costs were flat between December and February--and as of January were down a whopping 23 percent year over year.

Susan Donofio, an airline analyst with BT Alex Brown, said in an April 12 update that "jet fuel spot prices ended last week at $0.45 per gallon, down 1.4 percent from the beginning of this week and up 1.3 percent from a year ago." While the two-week average was up 1.5 percent over the same period last year, she said, business fares were up 6 percent.

So why the rise in fares? Most likely, it's to raise yields. But the carriers face a chicken-and-egg scenario: The reason yields have been dropping, apparently, is that fares are too high and companies are booking lower fares.

The airlines have succeeded in turning around their average domestic yields, which were up 7 percent in the first quarter compared with the last quarter. But the figure in March was still 1.2 percent lower than in March 1998. Meanwhile, companies continue to book lower fares. The difference between typical business fares and what companies actually paid (average fare paid) by March reached 39 percent, compared with 25 percent in February 1996.

Returning the salvo, the airlines' first increase this year, in February, was partly responsible for Amex's average fare paid, jumping by 6 percent between January and February.

How can airlines be raising fares, without a solid fuel-related excuse, as their yields were trending downward? Paine Webber analyst Sam Buttrick said, "Raising fares is the easy part. Getting more revenue is the challenge. When fares rise and yields do not, that tells us that businesses are increasingly using lower fares."

Or that business travel itself is dropping. "The airlines late last year began getting more than the usual excursion fare usage," said Harrell, "but it could be that the mix is changing because companies are traveling less. There's no way to tell for sure."

Meanwhile, Harrell said, the gap between typical business fares and lowest leisure fares is widening--up from a ratio of 2.5 times three years ago to four times now.