The party may be over. This week, the airlines raised airfares by as much as $10. The way this usually works is one carrier raises fares and if its rivals match it, the higher rates stick. In this case, American Airlines was the first to increase fares by $5 each way or $10 round-trip for flights more than 500 miles, and by $3 one-way or $6 round-trip for shorter journeys. Its competition (United, Delta, Southwest, U.S. Airways, Alaska, Frontier, and Virgin America) matched them.
That's not very much. In fact, you might not have noticed the difference if I (and other media outlets clocking each twitch of the air industry) hadn't told you. But it's not over yet. The price of fuel is going up, and that accounts for as much as 29% of an airline's costs. Airfare watchers across the country, from American Express to Wall Street, agree that as fuel rates rise, so will the price of flights.Consumers are hurt by it, but it's in the airlines' best financial interest to increase prices. Having successfully unbundled the cost of carrying luggage last year, and posting billions in profits because of it, the airlines now have some breathing room -- and they stand to make even more money if airfare is higher.
According to DailyFinance, American Express predicts that pricing will return to 2007 levels. That sounds reasonable on the face of it, but three years ago, we didn't have to pay to check baggage. Now we do, which means that if airfares go back to where they were, we're actually paying much more than we used to -- at least $50 more round-trip if we check a bag each way.
The several mergers since 2007, too, (Southwest and AirTran, Delta and Northwest, Continental and United) have limited the effect that competition can have on keeping pricing down at many smaller American airports.
Southwest once benefited from having negotiated some of the lowest fuel costs in the industry, but that period has ended, and now, USA Today reports, it's paying rates that slightly exceed some of its rivals, which will also drag down the low-cost carrier's ability to be among the cheapest. Its acquisition of AirTran will also potentially raise its operating costs, since it complicates its fleet with more types of aircraft to maintain.
The industry magazine Travel Age West predicts that in 2011, airlines will react to the rising price of fuel by cutting their refueling to the bone. If flights are overweight or delayed, the magazine predicts, we're going to see a lot more emergency landings at the wrong airports.
Meanwhile, the airline industry in India has taken a novel new step. Its airlines' CEOs and its consumer rights groups have formed a new council, to meet quarterly, that will address how airfares are set and the possibility of making airlines' pricing practices more transparent. Considering how vital our air superhighways are to the vitality and connectivity of our own nation, such hoped-for transparency would be an admirable future goal for us, too.
Managing your Portfolio
Keeping your portfolio and financial life fit!View Course »