Does An Airfare Cost Crisis Loom?

Sparked by ongoing unrest in the Middle East and North Africa and the threat of higher oil prices, air lines face a tough challenge to keep fares low enough to sustain demand while covering costs. It will also challenge travel agents - online and offline - to find the best fares for clients extending into the coming peak summer travel season.

Fare experts report that travelers face both increased airfares and ancillary fees as well as fuel surcharges. Much will depend on the carrier, the routes and destination, however, as carriers jockey for advantage in a competitive market.

JetBlue, for example implemented a $45 one way fuel surcharge for select Caribbean markets. And global giant Delta said its surcharges will vary by market.

John Werner, president and COO of MAST Vacation Partners told Travel Agent that MAST agents are concerned. “I know there is some caution on the part of agents as to whether rising airfares are going to cause a slowdown in bookings. Generally speaking, sales are up in MAST member offices since the first of the year and agencies have been quite busy. So the impact of higher fuel prices have not been felt yet.”

“Personally, I am concerned that $400 fuel surcharges on airline tickets to Europe is having a negative effect on bookings. People still want to travel but instead of going to Europe, they go elsewhere," Werner said.

“High airfares and high fuel surcharges are not good for the industry when you think about all the resort hotels, cruise ships, and tour offerings that have been built or created in the last ten years - all dependent on affordable airfares,” Werner said.

Fees are also going up for passengers checking more than two pieces of luggage and more carriers are eliminating once free snacks to save money. The New York Times reports Continental is eliminating free pretzels for economy passengers on domestic flights. Partner United has a similar policy .
Southwest Airlines, reports the Associated Press, has increase by $10 the price of many domestic round-trip airfares, citing the need to offset high fuel prices. (The price of NYMEX crude, which is directly tied to the price of jet fuel, was up 0.7 percent to $105.12 as of 3/8.)

Kevin Mitchell, chairman of the powerhouse Business Travel Coalition (BTC) commented to Travel Agent that there is substantial concern in the travel industry and warns of a backlash on fare hikes: “In 2008 when oil hit $147 a barrel, the economy was tanking so airlines could do little but absorb the losses, shed capacity and roll the dice with ancillary fees. Today, as the price of oil keeps climbing it is against a growing, but uneven economic recovery."

“With 6 broad-based fare increases so far this year, average fares are approaching the peak of 2008. However, when you add in some $9.2 billion in annualized ancillary fees, the overall cost of air travel is much higher and will have exceeded travel budgets for many businesses by the 3rd or 4th quarters of 2011. Travel managers and business unit leaders are increasingly concerned. I think airlines are reaching a point where passing on 100 percent of the increase in fuel costs will become problematic,” Mitchell said.

“On the consumer side, when you consider, on top of the 6 fare increases, that some half of that $9.2 billion in fees is hidden from consumers, who are often surprised at the airport, there is a growing risk of a backlash this summer from these price-sensitive travelers, “ Mitchell said.

“This will likely be made more probable by airlines introducing even more fees, and continuing to refuse to share the fee information with travel agents who advise and service more than 50 percent of travelers. Hopefully, Congress will require the sharing of this information through FAA Reauthorization legislation and save the airlines from themselves,” Mitchell said.

Tom Parsons, chief executive of travel web site told Bloomberg that: "The airlines are jacking up rates wherever they think they can get away with it. 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."

Parsons, a veteran fare watcher, also believes fees are going up for passengers who check more than two pieces of luggage. Ancillary fees can be expected to be a growing source of airline revenues - and often traveler frustration.

Airlines are in effect caught between a rock and hard place as higher fuel costs – even the threat of them –has to be balanced against dampening of consumer demand by higher costs. Tough choices will be made that could impact travel – and airline profitability - this summer

IATA, for example has already cut back its estimate of airline performance, estimating that high oil prices will cut airline profits by nearly 50 percent. One result is IATA’s downgrading its airline industry outlook for 2011 to $8.6 billion from the $9.1 billion it estimated in December 2010. This is a 46% fall in net profits compared to the $16 billion (revised from $15.1 billion) earned by the industry in 2010, IATA said.

“Political unrest in the Middle East has sent oil over $100 per barrel. That is significantly higher than the $84 per barrel that was the assumption in December. At the same time the global economy is now forecast to grow by 3.1 percent this year—a full 0.5 percentage point better than predicted just three months ago. But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1.4 percent,” IATA reported.

IATA, whose members include most international carriers, raised its 2011 average oil price assumption to $96 per barrel of Brent crude (up from $84 in December), in line with market forecasts. Including the impact of fuel hedging, which is roughly 50 percent of expected consumption, this will increase the industry fuel bill by $10 billion to a total of $166 billion.

Compared to levels in 2010, oil prices are now expected to be 20 percent higher in 2011, IATA said, with fuel now estimated to represent 29 percent of total operating costs (up from 26 percent in 2010).
While U.S. carriers may buck the trend, it could change quickly. The Air Transport Association (ATA) – representing U.S. domestic carriers - reported last month that passenger revenue rose 10 percent in January 2011 compared to the same month in 2010, marking the 13th consecutive month of revenue growth.

Miles flown by paying passengers rose 2.5 percent while the average price to fly one mile rose 7.2 percent. The ATA said international market performance remains strong as passenger revenue grew 16 percent, led in particular by a 30 percent increase in Pacific revenue. Domestic revenue grew 6.7 percent, fueled in large part by a 6.3 percent increase in yield.

ATA’s Chief Economist John Heimlich said. “While revenue performance is improving, carriers are challenged by the price of fuel – their single largest expense – which this week (mid- Feb.) hit the highest level since Oct. 1. 2008."

Rick Seaney, CEO of warns that summer airfares may be the worst in years and cites five broad-based airfare hikes so far this year. His rundown on the past four years: 2011 – 5 airfare hikes, 2010 – 4 airfare hikes and 2009 – 3 airfare hikes.

“In other words, recent domestic airfare hikes are very similar to those of late 2007 and early 2008. What happened then is the same thing we’re seeing today – the price of oil is soaring. For passengers today, though, it’s a bit worse since they are also paying for things that didn’t exist before, such as steep baggage fees plus “peak travel day” surcharges,” Seaney reports, warning that hikes on the international side may be higher than domestic. “ Fuel surcharges to Europe are now running about $360 roundtrip; the taxes add about $120. Do the math: your trip to Europe costs you $480 even before you spend a dime on airfare.”

Seaney, a respected fare watcher, asks the question on the minds of many travel agents, corporate managers and travelers: can it continue? His answer: “It depends how we passengers react. If we say “no” to more airfare hikes – by refusing to fly – the airlines will back off. But in the meantime, I expect the airlines will continue announcing new price increases.”

Seaney isn’t alone in his concerns. The Global Business Travel Foundation (GBTA) recently released the results of a survey of business travel professionals reactions to the ongoing crisis in the Middle East and North Africa. Of the 472 participants, nearly all (91 percent) said they are concerned about the impact of rising oil prices on travel costs as a result of the current political crisis . Nearly half (45 percent) reporting that they are very concerned.

The consensus to date is that airfare volatility – including rapid changes in airline pricing policy - will combine with a sluggish economic recovery to challenge all components of the travel industry and the traveling public.