Continental Airlines last night announced a new worldwide fare hike of $20 to $40 roundtrip to counter mounting fuel costs. In an atypically detailed pricing announcement, the carrier warned of decreased pension funding, additional furloughs and labor cost reductions unless it secures "prompt and significant reduction in fuel prices or a material improvement in the weak revenue environment."
"None of us can afford to operate with these high fuel costs," said Continental CEO Gordon Bethune. Without lower fuel prices and a stronger revenue environment, Continental predicted "a significant loss for 2004 and beyond." It also plans to apply for deficit reduction contribution relief under the recently enacted Pension Funding Equity Act
(BTN, April 26).
The price of a barrel of crude has traded above $40 since last week, prompting airlines around the world to apply or increase passenger fuel surcharges to ticket prices. U.S. carriers for months, however, have been unable to maintain passenger fuel surcharges or related fare hikes in the extremely price-competitive domestic market.
In addition to the overt warnings accompanying the price hike, Continental's announcement is notable for several reasons. The fare increase affects all worldwide fares, rather than domestic-only price increases tried repeatedly this year, and the $20 to $40 hike--dependent on flight length--is well above most recent attempts. Furthermore, the timing of the announcement is a departure from typical late-week pricing actions that allow competitors to mull potential matches over the weekend.
Thus far, no U.S. carriers announced matching fare hikes. Helane Becker, analyst at The Benchmark Co., in a research note this morning suggested Continental's worrisome statements will "cause other airlines to match this fare increase and finally address the elephant in the room."
"The announcement from Continental underscores just how critical we consider the next several months of revenue data to be in measuring for signs of demand recovery," added J.P. Morgan Securities analyst Jamie Baker. "Should trends by July or August fail to show any sequential improvement, it may suggest a cyclical first: that low-cost carriers are applying downward revenue pressure equal to that of uplifting economic trade winds. Needless to say, the far earlier-than-expected pronouncement that wage cuts may be required suggests Continental sees little cause for optimism."