— The squeeze is on.
Oil prices are putting the squeeze on airlines. In turn, the airlines are putting the squeeze on expansion plans, and travelers are feeling the squeeze of fewer seats and higher fares.
With all that pressure, it’s not surprising that both airline profits and consumer demand are in danger of getting squashed.
Higher jet fuel prices
Rising airfares are due in part to the price of oil, which began to climb months before the latest round of protests and bloodshed roiled the Middle East. Market jitters have only upped the ante, with crude oil up 21 percent (to $105 per barrel) since the first of the year.
The concurrent rise in the price of jet fuel has been even steeper, climbing from $2.50 per gallon in late December to $3.12 this week (up 25 percent). According to John Heimlich, chief economist for the Air Transport Association, each one-cent increase in price costs the airlines $175 million. Should the gallon price average $3 for the year, the added cost would total $15 billion.
But, unlike 2008, when oil hit $147 per barrel, this is not strictly a petroleum-based problem. Shrunken capacity and rebounding demand also have served as catalysts for higher fares. According to the latest figures from American Express Business Travel, the average fare paid by the company’s business clients in February was $250 one-way, up 11 percent over the year before. For leisure travelers, one-way discount fares hit $99, up 13 percent.
Whether they can go much higher depends on how the various parties respond to the squeeze. “Oil prices are going to continue to fluctuate with the geopolitical landscape,” said George Hobica of AirfareWatchdog.com. “The airlines are going to charge what they think they can get away with.”
2008 all over again?
Hence the eight attempted fare hikes that Rick Seaney, CEO of FareCompare.com, has tracked since the beginning of the year, six of which have stuck: “If you paid $240 for a ticket on Jan. 1, it would cost you $300 today.”
In fact, said Seaney, the current situation offers some scary parallels with spring 2008.
“In March 2008, we had oil prices cresting at $106 per barrel, which is about where we are now,” he said. “We also had a couple of unsuccessful hikes in late March, almost exactly like this year. I’m watching it, thinking, wow, this is like ‘Groundhog Day.’ ”
On the other hand, and just like Bill Murray’s cranky weatherman, the airlines have learned to adapt. Baggage fees and fuel surcharges, mergers and capacity cuts — all came to the fore three years ago and are either ubiquitous or in the offing today. Consider:
Fuel surcharges: For now, foreign carriers, including Qantas and British Airways, are leading the way on fuel surcharges, although Delta and JetBlue both said earlier this month that they planned to add surcharges on select routes. “Airlines are using them to recoup some of their costs,” said Christa Degnan Manning, director of research for American Express Business Travel. “It’s going to make the difference between making money and losing money this year.”
Capacity cuts: “Early in the year, it looked like the airlines would add too much capacity back in,” said analyst Matthew Jacob of ITG Investment Research. “But as oil prices have increased, many are talking about taking more out.”
Last week, that talk got especially loud as several airlines announced plans to trim operations during the second half of the year. Citing high fuel costs, Delta, United and US Airways all announced capacity cuts of 2 to 3 percent. Most of the cuts will be felt on domestic routes, although Delta and American have (temporarily) curtailed service to Japan in the wake of the country’s ongoing crises.
“A lot of the mainline carriers are happy to cede the domestic market to the low-cost carriers,” said Bob Brindley, vice president of business development at Advito, a division of BCD Travel. In fact, Southwest expects to expand its capacity 5 to 6 percent this year — it recently added service from Charleston and Greenville-Spartanburg, S.C., and, more tellingly, Newark — while JetBlue expects to grow 7 to 9 percent.
Mergers: Speaking of Southwest, the company’s proposed buyout of low-cost competitor AirTran received a boost earlier this week when AirTran shareholders voted to accept the deal. (It still needs to pass muster with anti-trust regulators.) Assuming the merger goes through, it’ll further cement Southwest’s position as the nation’s No. 1 carrier in terms of domestic passengers carried.
The move will not only expand the airline’s network but is also expected to enhance its ability to attract premium-paying business travelers. “Southwest may start acting more like a mainline carrier,” said Brindley. “If they continue to grow their market share, it’ll reach a point where they’ll have greater pricing power.”
Likewise, and despite the fact that United and Continental still operate as separate companies, some observers suggest travelers are already seeing what the companies’ merged future may look like. “Last summer, nonstops between Newark and Los Angeles were $450. Yesterday, they were $600,” said Hobica. “Anybody traveling on routes that were served by both airlines is going to pay more.”
Buy now or wait?
All of which factors into the key decision facing travelers considering summer trips: Given the recent escalation in ticket prices, should you bite the bullet and buy now or hold off and hope that prices come back down?
The reason the last two fare hikes didn’t stick, said Seaney, wasn’t because consumers had reached their breaking point, but rather because March is typically a slow period for travel shopping: “People have been consuming travel [for example, taking spring break trips purchased in January and February],” he said, “but they don’t start shopping for summer travel until April.”
As a result, he suggests watching prices for a little longer and taking another cue from 2008.
“Back in July 2008, oil was $145 per barrel and a lot of people locked in their Thanksgiving and Christmas tickets at ridiculously high prices only to see oil go from $145 to $40,” he said. “Trying to approach travel like a day trader is not the best idea.”