Airfare Hikes Not Expected Despite Carriers’ Troubles

Don’t expect fares to jump just because four major airlines are now in bankruptcy and desperately need the extra cash.

So say industry observers who maintain that the slide in ticket prices in recent years won’t reverse course -- at least not anytime soon -- even with four of the seven largest U.S. carriers operating under Chapter 11.

“Most of the pressure on fares is still downward,” said Robert Harrell, whose Harrell Associates in New York tracks industry pricing.

Delta Air Lines Inc. and Northwest Airlines Corp. last week joined UAL Corp.’s United Airlines and US Airways Group Inc. in seeking protection from creditors in U.S. Bankruptcy Court.

Because all continue to fly -- and the underlying issues that landed them in Chapter 11 haven’t gone away -- nothing short of a major carrier going out of business may do much to change the price picture, analysts said.

The large, traditional airlines have suffered multibillion-dollar losses in good part because drooping fares aren’t enough to cover their enormous debts, pension obligations and daily operating costs.

Although passenger traffic has rebounded from its slump after the Sept. 11 terrorist attacks, the big carriers are still struggling to raise prices because of increasing competition from lower-cost discount airlines.

Ticket prices, as measured by the U.S. Department of Transportation’s most recent air travel price index, fell 4.3% in this year’s first quarter from a year earlier. Fares have risen a paltry 3.9% over the last decade, the index showed, even as overall consumer prices rose 29%.

Those ticket prices include taxes and various security fees imposed after 9/11. Without those added costs, the decline might have been steeper.

Both leisure and business fares are falling. In this year’s second quarter, the average one-way domestic fare paid by business travelers was $218, down 16% from $259 in 2000, American Express Co.’s travel management unit reported last week.

That’s been a boon for passengers but a headache for the airlines.

Hurricane Katrina made matters worse. The carriers’ fuel costs, which typically account for about 15% of their total expenses, were already up sharply when the storm sent them to unprecedented highs by disrupting Gulf Coast production.

To remedy the problem, Delta and Northwest said, they plan to use the Chapter 11 process to shrink their service -- or “capacity” in airline jargon -- to become more efficient, lower costs and better align their size with today’s low-fare environment.

Using simple economics, reducing the supply of seats should help the airlines start charging more for those seats, assuming the same number of people are demanding to fly.

But few things are simple in the airline business.

Even if Delta, Northwest and the others do shrink by 10% or 15%, as many analysts expect, that wouldn’t be enough to let carriers lift prices significantly, said Henry Oechler Jr., an airline expert at law firm Chadbourne & Parke in New York.

“They probably have a little wiggle room to raise fares,” Oechler said, “but it’s not going to be enough to make a difference” in their profitability, “absent a dramatic reduction in their expenses.”

The capacity of an entire major airline would probably have to be eliminated before the industry could raise fares in a meaningful way, he said. But with Chapter 11 allowing Delta and the others to reorganize, rather than liquidate, that’s not expected to happen.

And even as those airlines cut back, younger, low-cost carriers are adding seats. JetBlue Airways Corp., for example, is placing 100 new Embraer 100-seat jetliners on its fleet starting this year, “and all these planes are going to mean new markets, new routes,” said Terry Trippler, an analyst at travel website CheapSeats.com.

“Airfares are going to remain stable simply because of all these airplanes being added to the system,” he said.

Why don’t carriers try to raise fares anyway? The airlines themselves don’t publicly discuss future pricing strategies, so as not to run afoul of antitrust laws.

But analysts said there were several reasons that fares were unlikely to go much higher, even with so many carriers in desperate straits:

* The growing clout of the discount airlines, led by Southwest Airlines Co., keeps a lid on prices where those carriers fly. Analysts estimate that the low-cost airlines now account for one-quarter to one-third of U.S. air travel, and their share is rising.

“Southwest is the big elephant in the room,” Oechler said.

* Airlines hate losing even a fraction of market share to rivals, so they often match the lowest fares in a market where they compete with others -- even at the risk of losing money.

* Carriers in bankruptcy are also loath to raise prices because it makes them look desperate. Sometimes they even hold fare sales to maintain their passenger traffic and to keep generating badly needed cash.

“They like to present the position that everything is normal,” Harrell said. United and US Airways, for example, haven’t raised fares well above their competitors’ prices.

To be sure, most of the airlines have managed to push through relatively small fare increases this year -- often $5 or $10 at a time on one-way tickets -- to help cover soaring fuel costs.

They probably could keep doing that without seeing a drop in passengers’ demand -- up to a point, Oechler said.

“I think the American consumer understands the problem and would be receptive to some higher prices,” he said. But he added: They will pay more only “as long as it’s not much out of line with what a low-cost carrier like Southwest is charging.”