Air Fares Up, But Fuel Costs Far Outpace The Rise

June 13, 2008

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As expensive and uncomfortable as air travel may be for passengers, the pain is worse for airlines, as fuel costs approach 40 percent of a ticket price -- even after two years of fare increases.

It's getting tough for carriers struggling to run the leanest possible operations to persuade people to pay more money for their cramped, crowded and frequently delayed flights.

"This situation -- skyrocketing fuel costs -- has gone from a serious cost problem a year ago into one that is going to completely torpedo the way airlines do business," said Michael Boyd, airline consultant at The Boyd Group.

Despite their best efforts to raise fares, the airline industry is being mauled as the price of crude oil notches record after record above USD$130 a barrel.

The Air Transport Association, the main lobby group for big US airlines, said this week the portion of a ticket needed to pay for fuel is nearly 40 percent, compared with 15 percent in 2000. This massive increase threatens to undo the progress made in 2006 and 2007, when the industry began to recover from the downturn that began in 2001.

After the September 11 attacks, terror concerns, economic weakness and low-fare competition pressured fares and tipped four major airlines -- United Airlines, US Airways, Delta Air Lines and Northwest Airlines -- into bankruptcy.

Now, as airlines face another downturn, aggravated by high fuel prices, major carriers are cutting capacity and staff in the hope of reducing costs so they can survive.

United Airlines said this month it would cut its mainline domestic capacity by up to 18 percent. American Airlines said it would trim domestic capacity by up to 12 percent in the fourth quarter. Continental Airlines and US Airways also announced major cuts.

"The industry needs to act decisively and responsibly to size our businesses appropriately to reflect the changing market reality," United's Chief Executive Glenn Tilton said on Thursday at the company's annual shareholder meeting.

At current fuel prices, the carrier's projected 2008 fuel bill would be USD$9.5 billion, up USD$3.5 billion from 2007, Tilton said, demonstrating the scale of the problem.

Despite a near-two-year string of industry-wide fare increases -- 13 in 2008 so far, according to FareCompare -- fares have yet to fully rebound from years of decline, accelerated by aggressive low-cost airlines such as Southwest Airlines and JetBlue Airways.

Research provided by The Boyd Group shows the average price for a domestic ticket in 2007 was USD$181.91, compared with USD$188.16 in 2000 -- when the price of a barrel of oil was about USD$100 less than it is today.

Nowadays, airlines devote USD$74.03 of the average ticket price to jet fuel, compared with just USD$31.77 in 2000, Boyd said.

With this unprecedented burden on the airlines, management is combing operations for new revenue sources. For example, carriers now charge for meals and snacks that once were complimentary as well as for preferred seating in coach cabins.

Earlier this year, major airlines began charging customers to check a second bag, a move that drew the ire of passengers.

In May, American Airlines took the next controversial step, saying it would charge passengers USD$15 to check just one bag. That new fee, which outraged some travelers, was matched on Thursday by United Airlines and US Airways. Experts predict others will adopt the fee too.

"The economic rules of our industry have changed substantially and we simply can't keep running the same plays," US Airways CEO Doug Parker said on Thursday in a message to employees.

(Reuters)