Airlines hike fares, surcharges for costly fuel

Published March 07, 2011

| Reuters

By Karen Jacobs

ATLANTA (Reuters) - U.S. airlines are raising fares and rolling out surcharges as runaway fuel prices threaten to eat into profits.

Fuel surcharges are being added on international routes. JetBlue Airways Corp <JBLU.O> said on Monday it recently implemented a $45 one-way surcharge in select Caribbean markets. Delta Air Lines Inc <DAL.N> said its surcharges vary by market.

Fees are also going up for passengers checking more than two pieces of luggage, and more carriers are ditching free snacks to save money, said Tom Parsons, chief executive of travel site Bestfares.com.

"The airlines are jacking up rates wherever they think they can get away with it," Parsons said. "From the airfares to the fuel surcharges to the peak travel day surcharges, there's not much you can get from an airline these days other than a seat assignment."

Oil prices continued to rise on Monday amid continued unrest in the Middle East and North Africa.

NYMEX crude, which is directly tied to the price of jet fuel, was up 0.7 percent to $105.12. Shares of major U.S. airlines were higher, with the Arca Airline index <.XAL> up 0.2 percent.

So far this year, several U.S. fare increases -- supported by strong demand for travel -- have helped the industry offset higher energy prices. US Airways Group <LCC.N> said last week that increases in passenger unit revenue through the end of February were likely sufficient to offset rising fuel prices through that period.

"Economic growth still remains strong," boding well for travel demand, said Ray Neidl, senior aerospace specialist with Maxim Group. He said cost reductions and capacity restraint in recent years have helped airlines fill more seats.

"Besides the ticket price increases, they've been doing really excellent yield management, eliminating deep discounts and fare sales and just concentrating on managing their seat inventory to the best degree possible," Neidl said.

Still, the threat from fuel looms not only in higher costs for airlines, but also in a potential dampening of demand as airlines get ready for warm weather and the peak travel season. Deutsche Bank cut price targets on major U.S. carriers on Monday, saying every penny per gallon rise in jet fuel costs the industry $170 million a year.

"Passengers are not necessarily going to be willing to pay a higher fare just because oil prices are higher," said Matthew Jacob, an airline analyst with ITG Investment Research.

"At some point, the higher oil prices may start to eat into discretionary income levels and that could in turn, start impacting the demand side of the equation," Jacob said.

The oil price uncertainty has led carriers to scale back plans to boost seat capacity this year. Frontier Airlines, a unit of Republic Airways Holdings, announced on Monday that capacity will be flat in the second quarter, against previous plans for growth of as much as 2.5 percent.

AMR Corp's <AMR.N> American Airlines said last week it would cut capacity growth for 2011 by 1 percent to 3.3 percent, and Delta last month outlined a capacity cut and plans to retire older, less fuel-efficient aircraft such as DC9s.

Discount carrier Southwest Airlines Co <LUV.N> has taken "modest" fare increases but has not imposed fuel surcharges and doesn't plan to add incremental fees to offset fuel costs, spokeswoman Ashley Dillon said.

"We don't want to nickel and dime our customers," she added.

(Reporting by Karen Jacobs; Editing by Gary Hill)

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