Airfares Start Soaring on Oil Prices and Capacity Cuts

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The price of an airline ticket is heading sharply higher, as U.S. airlines face steeper fuel costs and continue to cut their capacity to keep profits from falling.

According to research compiled by American Express (AXP), the average airfare paid in January was 8% higher compared to January 2010. Published fares for discount travel rose 5%, first-class fares were up 2% and full-coach fares climbed 4%. Typical business fares -- such as a midweek ticket -- fell 3%. And keep in mind that January was before oil prices started spiking in earnest as a result of the current Middle East unrest, so ticket prices can be expected to move even higher in the next several months.

"Through our own transaction data, which includes taxes, fees and surcharges, while we're just seeing airfares rise slightly, what you're seeing is a bigger impact from fuel surcharges," says Christa Degnan Manning, director of research and media for American Express Business Travel Global Advisory Services Group. "That is something that business travelers, when they are shopping for fares, don't always get visibility into."

Manning says to maximize travel budgets, travelers need to take advantage of restricted tickets and advance-purchase fares. But as Cathay Pacific CEO Tony Tyler recently told DailyFinance: "At the end of the day, if people want to travel, they will have to pay for fuel."

Where U.S. Carriers Are Ahead of Europe's

"Because the price of fares is going up, surcharges are going up, and capacity is constrained," Manning says. "To get the most cost-effective fares, you really need to plan ahead." The International Air Transport Association (IATA), the airline industry's trade association, reported this week that U.S. carriers had stepped out in front of European and Asia airlines in cutting capacity over the last couple of years.

North American airlines cut 2.8% of capacity in 2008 and 5.6% in 2009. European carriers were up 2.9% in 2008 and down 5.4% in 2009. Asian carriers were up 0.6% in 2008 and cut 4.8% in 2009.

"The gap between capacity and demand was quite wide, and that has narrowed," says Chris Goater, an IATA spokesman based in Geneva. "The American carriers have been particularly good at responding quickly during the recession, which managed to protect profits better than European carriers have done."

The IATA says it expects profits at U.S. airlines to decline from $4.7 billion in 2010 to $3.2 billion because of higher oil prices. On a global basis, it sees airlines profits cut in half, from an estimated $16 billion in 2010 to $8.6 billion this year. That's based on a Brent crude oil price of $96 a barrel, but that oil is now going for over $114 a barrel, which could mean even slimmer profits for airlines.

A Reversal of Benchmarks

Last month, Delta Air Lines (DAL) President Ed Bastian told a presentation he expects the carrier to pay $400 million more for fuel this quarter than in the first quarter of 2010. "Yet our margins are going to be relatively the same," Bastian said, estimating them at 1% to 3%.

He said there had been four price increases in 45 days. In addition Delta was slowing capacity growth. It had expected to raise capacity by 5% to 7%, he said, but would increase it by only 3% to 5% instead.

The Financial Times disclosed Thursday that many U.S. airlines were losing profits because they had hedged their fuel prices against the U.S. crude benchmark, West Texas Intermediate (WTI), but jet fuel prices are actually based on Brent crude prices, a European standard. Normally this wouldn't be a problem because both prices run in tandem. But in recent months WTI prices have been substantially below Brent prices. So, while Brent crude was trading at $114 a barrel on Thursday, WTI changed hands at $100.95.

On the plus side, IATA is forecasting a 5.6% rise in passenger traffic in 2011 and a 6.1% rise in cargo. But those people and that freight are going to be paying more to move.


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18 Comments

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russeolson

Thank the Speculators. They almost destoyed the economy 2 years ago and are trying to suceed this time.

March 05 2011 at 6:42 PM Report abuse +1 rate up rate down Reply
gpfs

Your a Oil Company CEO, you have domestic oil which cost you $10 to produce, the market price is $100. What are you going to sell it for? Your answer will probably explain why your not a CEO!

March 05 2011 at 12:54 PM Report abuse +1 rate up rate down Reply
2 replies to gpfs's comment
russeolson

The government leases Public Land to the oil companies for pennies on the dollar and the oil companies give the Politcians pennies on the dollar to pass laws so they can lease more Public Land. And the American people get screwed from both ends

March 05 2011 at 6:52 PM Report abuse +1 rate up rate down Reply
mullermugs32

There is now inflation, all is well according to Ben.

March 04 2011 at 7:37 PM Report abuse +2 rate up rate down Reply
2 replies to mullermugs32's comment
gpfs

QE2 is over in June, watch what happens next.

March 05 2011 at 12:56 PM Report abuse rate up rate down Reply
Frank

I don't think I would expect to see the increases in 2011 that they are forecasting. Between the increased airfares and the baggage charges (plus other fee's like "premium" economy - aisle seat anyone) many can not afford the luxury of air travel. Couple that with 16% unemployment and it might lead to hard times for the airlines again.

March 04 2011 at 6:13 PM Report abuse rate up rate down Reply
Paul

I dont let this bother me,I just dont fly anymore.Good for the air, my wallet,and my dignity.

March 04 2011 at 3:42 PM Report abuse +6 rate up rate down Reply
1 reply to Paul's comment
Sonny

As an airplane owner, I will feel the higher prices of fuel as well. I have gas in my plane that cost a $1.00 a gallon less than it costs now.............and my plane holds 72 gallons. That is $72 more to fill up.........ouch, but it still beats the long lines in airports and all the TSA govt crap!

March 04 2011 at 2:40 PM Report abuse +2 rate up rate down Reply
2 replies to Sonny's comment
doedill7

Do you fly your plane from LA to NYC, and back ? didn't think so

March 04 2011 at 6:39 PM Report abuse rate up rate down Reply
whaaaathuh

gee sonny i'm sorry to hear that..my heart bleeds for you..

March 05 2011 at 2:47 PM Report abuse rate up rate down Reply
scottee

the more our government does for us, the harder they make it for us. they need to put the dollar back on the gold standard and let the free market determine interest rates, gold prices and stock prices. they need to stop with the stimulus, stop with the printing and diluting of our dollar, stop with the tax incentives, stop social engineering via the tax code, just stop trying to do everything for everybody while sending us the bill!

March 04 2011 at 11:53 AM Report abuse +3 rate up rate down Reply
1 reply to scottee's comment
Paul

That would never work,the ruling class/gov. couldn't manipulate the value of the currency and make billions of dollars doing it,just anouther way of sticking to the average Joe.

March 04 2011 at 3:47 PM Report abuse +2 rate up rate down Reply
hbluecollar

We are being held hoistage by the oil companies !! When will people realize that if we boycott part of them the prices would come down. If we sit here and still use the services they will laugh all the way to the bank.....WHy si it when the oil spill in the gulf gas prices did not go up???It has been since November that the prices have gone up. I for one won't be flying anywhere this year. Andf if other people would stay local for vactions this year beleive me they will feel it with the costs going up and salaries not, People won't be able to aford the weekend getaways liek they use too

March 04 2011 at 8:12 AM Report abuse -1 rate up rate down Reply
3 replies to hbluecollar's comment