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Tuesday, August 10, 2010

Higher Fares, Fees Rev Up Airlines

The Wall Street Journal

The cheap-flights party is over.

After a string of mostly profitable earnings reports, a sizable jump in fee revenues and an uptick in fares, airlines are enjoying an unusually strong recovery coming off a dire two years and won't be shifting gears anytime soon.

"The pricing trend is up," says Rick Seaney, chief executive of Farecompare.com, an air-travel website. "It's not hard to trend up when we're coming off year-over-year comparisons that were at decade lows last year."

Industrywide second-quarter profits for the nine largest airlines rolled in late last month at $1.86 billion, only $8 million behind a decade high set in 2007, according to AirlineFinancials.com. Every major airline, with the exception of American Airlines, was in the black. Revenues reached $31.7 billion, just under the record $33.3 billion set in the second quarter of 2008.

That's a considerable comeback after two tough years that also saw crude oil reach a record $147 a barrel in July 2008. Since 2000, the industry has had estimated cumulative losses of $60 billion, according to the Air Transport Association.
Fees Add Up

The industry achieved profitability by sharply cutting the number of planes in the skies and instituting new fees for baggage, getting a pillow and landing an aisle seat, among other things. That was amid a recession that also saw a number of carriers close doors and no new ones pop up. It helped, too, that the cost of fuel has fallen considerably.

"Airlines aren't adding back capacity, and without that there's a lot of competition for those available seats," says Anne Banas, editor of SmarterTravel.com. "That creates a situation where the prices go up month over month from previous years."

Airfares climbed nearly 5% in the first quarter, the second-highest January-to-March showing since 2001, according to the Bureau of Transportation Statistics. Industry experts expect numbers due out this fall will show fares jumped 8% to 9% in the second quarter.

The average domestic round-trip fare in the first quarter stood at $328, which accounts for the ticket plus taxes and fees collected by outside entities, like the government and airports. It does not include ancillary fees that airlines have been charging in recent years.

In 2009, carriers world-wide generated $13.5 billion in what are called a-la-carte fees, a 43% jump over the prior year, according to IdeaWorks, an airline consultant.

U.S.-based airlines were the top three to take in ancillary charges, thanks mostly to baggage fees. United Airlines and American Airlines each brought in about $1.9 billion, while Delta Air Lines rang up $1.4 billion, the IdeaWorks study says.

"The airlines finally figured out how to earn more money without scaring people away by the purchase price of a ticket," says George Hobica, founder of Airfarewatchdog.com.

As a result, most airlines are looking at new ways to charge extra fees. United Airlines President John Tague on a quarterly conference call late last month called the a-la-carte fees "an unequivocal success" that is on track to generate $1 billion a year.
Here to Stay

"I think this is the model of the future," Mr. Tague said. "I think there's tremendous upside going forward, and I think there are a lot of optional value-added opportunities for our customers as well."

Though the fees have angered many consumers who were accustomed to baggage and free meals as part of the ticket purchase, the airlines consider them choices that dictate the cost of your travel.

"If we raise the price of a ticket too high, we price out a certain segment of the market," says ATA spokesman David Casteleveter.

"This a-la-carte model parrots so many of the other models that we have been living with for many years," Mr. Casteleveter adds. "I wouldn't buy an all-inclusive pizza. I want to be able to choose what to put on it."

Of course, there will always be fare deals. But distinguishing how good those are will become harder as airlines become more creative in tacking on fees.