Why Airfares Are Low

Jun 17, 2004
Why airfares stay so low - while airlines struggle

Carriers are hesitant to raise prices too much, for fear of losing more customers to Southwest.

By Alexandra Marks

NEW YORK - Oil prices might be hovering just below record highs, but it's still almost as cheap to fly as it is to take the bus.

In fact, airfares are almost 20 percent lower than they were in 2000, even though jet fuel is more than twice as expensive.

That's expected to change this year, but not by much. Fares, which have been inching up in response to the spiraling oil prices, will probably continue to rise by only modest increments.

That's not good news for the ailing aviation industry, which, despite record cost-cutting and restructuring, is expected to rack up its sixth straight year of multibillion-dollar losses in 2006. But fliers - who are taking to the skies in record numbers - can thank something that could be called "the Southwest effect" for continued bargain-basement prices.

"Given how big Southwest is, they're a pricing leader, and they'll continue to keep [downward] pressure on airfares," says Helane Becker, an airline analyst at the Benchmark Co. in New York. "So there's a limit as to how high fares can go."

Southwest is now the nation's third-largest carrier, and it's growing at 10 percent a year. Its current ability to keep fares low is partly because it has 75 percent of its jet fuel hedged for this year. That has allowed it to pay about $1.20 a gallon, compared with the $2 a gallon most other carriers are paying.

So Southwest can remain profitable while other carriers - even Southwest's low-cost cohorts like JetBlue - are wallowing in jet-fueled red ink. Even though most airlines won't make enough money to cover their basic operating costs, they're hesitant to raise prices too much, for fear of losing even more customers to Southwest.

That means the so-called legacy carriers like United - which just emerged from three years in bankruptcy during which it shed $7 billion in annual costs - are facing another unprofitable year.

"They are going to limp along, but how long they can do this depends on the next economic downturn and the severity of it," says Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa. "If it's in the next couple of years, it could be difficult, because there's just nothing left to mortgage."

Yet some analysts believe this could at least be a turnaround year - if not a profitable one - for the legacy carriers. That's because as fuel prices push fares up - even if only a little for the leisure travelers - the legacy carriers will be able to increase business fares more. And because the legacy carriers have more extensive networks than their low-cost rivals, they can begin charging bigger premiums for people who want to go to out-of-the way places that aren't served by the low-cost carriers.

"The auto-part salesman in North Carolina that has to get to Erie, Pa., will pay anything to get there. There's huge growth in those markets, and Southwest can't get their paws on those passengers," says Michael Boyd, president of the Boyd Group in Evergreen, Colo.

While the legacy carriers can begin to cash in on their networks, Mr. Boyd notes, the low-cost carriers are more constrained in how much they can raise their fares because their success - and profits - are dependent on extremely price-sensitive travelers, many of whom would rather stay home on the couch than pay too much to see relatives. Add to this the fact that Southwest would also be losing money were it not hedged out until 2009, and Boyd believes that analysts will be talking about a very different "Southwest effect" come 2007.

"They're living on borrowed time, and they know that," says Boyd, referring to Southwest. "The Southwest model today doesn't work unless someone's paying 30 percent of your fuel. So I'd say, the Southwest effect [we're talking about now] is the reason that a year from now we'll be talking about the low-fare carriers as being in such deep trouble."

www.csmonitor.com | Copyright © 2006 The Christian Science Monitor. All rights reserved.
Boyd seems to make the same mistake as several other folks and look at low cost carriers as catering primarily to the leisure traveller. As much as those people, apparently including Boyd, don't want to admit it, Southwest caters more to a business traveller than the leisure traveller. If Southwest "got their paws" on that auto parts guy in North Carolina who is willing to "pay anything" to get to Erie PA, the walk up fare they would charge would be not bend him over to make the trip. Southwest has more passengers who pay the fully refundable, unrestricted fare than any other airline. Is that the leisure traveller who is doing that?

I have no doubt that Southwest recognizes that their fuel hedges are running out...witness their fare recent fare increase. Small...only about $3...but with 75 million passengers, that fare increase amounts to about $225 million more in revenues. What really baffles me though is the "strategy" of the airlines who have fuel costs significantly higher than Southwest of offering lower fares on their advance purchase tickets...and still hope to make up the difference by holding that auto parts guy from North Carolina hostage by charging him a price that redefines "anything" on routes that do not have low fare competition.

It seems to me that while SWA is raising fares slightly well in advance of the expiration of their fuel hedges, it makes less of a "dent" in the all important leisure travellers budget that an "ohmygodwearelosingmoney" increase of $20 a pop.
Here's Ms Mark's Bio.

Just about anyone of us on this board has more knowledge of the avaition business than she does. She posting a story where we on this site have already gone

Thursday November 10, 2005
Alexandra Marks is a print and broadcast journalist with more than 20 years
experience in national and international news reporting.
She is currently a senior national correspondent for The Christian Science
Monitor, covering a variety of topics from aviation safety to national politics.
Prior to returning to the Monitor in 1997, Marks was a correspondent for NBC
News, where she covered the 1996 presidential election. Before being recruited by the
network, Marks covered the media and telecommunications policy for the Monitor. She
has worked for The Christian Science Monitor in various capacities since 1991. She was
a correspondent, producer and anchor for Monitor News, the organization's national
evening newscast. She covered domestic policy, specializing in health care reform. She
served as the Latin American correspondent for Monitor Radio, the organizations public
radio arm. Based in Argentina, she covered the political and economic implications of the
continent's emerging democracies.
Marks left the Monitor in 1993 to work as press secretary for Senator John Kerry.
Marks began her career in Burlington, Vermont. She worked for the Vanguard
Press and the Burlington Free Press before being recruited to work at the local ABC
affiliate. After a year, she moved to WCAX, the state's largest television station. There
she worked as an investigative reporter focusing on the health care crisis and medical
billing practices. She also covered city hall and produced and anchored the 11:00 p.m.
newscast. After leaving Vermont, she moved to Boston, where she worked for WGBH's
10:00 News before joining the Monitor staff.
Sure, don't like the facts then take issue with the fact giver. What did she say in the article that was not factual or not sourced.
What did she say in the article that was not factual or not sourced.

"In fact, airfares are almost 20 percent lower than they were in 2000, even though jet fuel is more than twice as expensive."

According to the BTS, average airfares in 3Q2005 (the latest available) are almost exactly the same as 3Q2000 - actually slightly higher. BTS' ATPI shows 3Q2000 = 109.0 vs 2005 = 109.2 on a scale that uses 1995 fares as 100. Perhaps the writer was talking about was the low-end fares, but that's not what was said. Or Perhaps the writer was only talking about NYC-area fares, which with the growth of B6 could indeed be lower. But that wasn't what was said either.

"Its current ability to keep fares low is partly because it has 75 percent of its jet fuel hedged for this year."

Per WN's 4Q2005 report, they are 75% hedged for only the 1Q2006 and "over 70%" hedged for the remainder of 2006.

Sure, don't like the facts then take issue with the fact giver. What did she say in the article that was not factual or not sourced.

My statement was that the issue was already discussed here. There is nothing in the article that you couldn't extract from past posts on this site already. With that being said, here's an article she wrote a few years ago.

What do you think? Haven't we been there done that on this site as well?

United's pension woes: sign of bigger issue

Ailing airline may end all of its pension plans, creating the biggest default in US history and forcing a possible bailout.

By Alexandra Marks | Staff writer of The Christian Science Monitor