Oil prices don't vex airlines; but fees could rise

Posted: January 12, 2011

Will 2011 be another 2008 for airlines, with a surge in oil prices sending some carriers to near-bankruptcy?

No, it's a leaner industry. Airlines made lasting changes after oil peaked at $147 a barrel in summer 2008 and the financial collapse on Wall Street plunged the economy into recession, crippling demand for corporate and consumer air travel.

To offset higher fuel and operating costs, airlines might push through a wave of new fees that are sure to be unpopular. One industry watcher has a lineup that shows how inventive the airlines might be:

Charging for lap-held infants, paying by the pound for checked luggage, fees for carry-ons, and a "convenience" fee to book on the Internet.

"We can withstand this," US Airways Group Inc. chief executive officer Doug Parker told CNBC last week. "I am not about to suggest that rising oil prices are good for the business. It's going to increase our cost."

But airlines made fundamental changes in the last 21/2 years and are in a better position to cope.

"Most carriers would still make money in 2011 in a $100 oil environment," airline analyst James Higgins of Soleil Securities wrote in a client note.

For starters, there is less competition. After a flurry of mergers and acquisitions, there are fewer airlines. Delta Air Lines Inc. combined with Northwest Ailines Corp. United Airlines is tying the knot with Continental Airlines Inc. Southwest Airlines Co. announced it would buy rival AirTran Airways.

"The competition is certainly much less fragmented," said airline analyst Hunter Keay of Stifel Nicolaus Capital Markets. "There's been a lot of inefficient capacity taken out of the system."

Airlines managed the recession with capacity cuts - fewer seats and flights. The result: Planes are fuller. Even as passengers returned, airlines limited the number of flights and planes they restored. "U.S. capacity is down about 6.5 percent through 2011," Higgins said.

At the same time, airlines improved their balance sheets. "They have better cash positions. They've got lighter order books in terms of aircraft deliveries, so fewer capital obligations going forward," Keay said.

Airlines got rid of some of their older gas-guzzler jets and now fly more fuel-efficient planes.

They also are buying fewer fuel hedges, which are contracts that lock in fuel prices. "Airlines are still hedging, but doing it in a smarter way," Higgins said. "They were locked into situations in 2008 where they owed a lot of collateral."

Since 2008, airlines have instituted a host of new fees - for checked bags, pillows and blankets, priority boarding, ticket changes, choice seats with legroom.

Such "ancillary" revenue has increased about $2 billion for the industry. "That, in and of itself, covers a 10 percent increase in fuel prices," Higgins said.

Airlines will pass along higher fuel prices to customers by raising fares, adding fees, trimming capacity, and possible fuel surcharges, experts said.

Airfares on some domestic routes have risen three times in the last month, starting in December with a $3 to $5 one-way increase, followed at the end of December by a $10 one-way rise on select routes, said JPMorgan Chase & Co. analyst Jamie Baker.

The latest airfare increase began last week, when Delta initiated a $2 to $5 one-way increase on some routes, followed by Southwest Airlines. Other airlines then matched the increases.

The flurry of recent domestic fare increases supports "our view that managements are unlikely to sit idly by as oil prices chip away at 2011 business plans," Baker wrote.

Airfarewatchdog.com founder George Hobica predicts more airline fees in 2011. He said they could include fees for:

Infants to ride in a parent's lap. International flights already charge 10 percent of an adult fare for a "lap" child.

In-person check-in at airports. Ryanair in the United Kingdom charges passengers who show up without a preprinted boarding pass.

Using a credit card. Passengers who pay with cash would get a 3 percent discount.

Transfer of a nonrefundable ticket to someone else: a name-change fee. U.S. airlines would allow passengers to reassign their tickets for a fee.

Checked baggage based on weight - paying by the pound.

Internet convenience to book online. "A number of airlines in Europe do this," Hobica said. "Allegiant Airlines charges $14.99 to use the Internet. You have to go to the airport to avoid it."

Carry-on bags. Spirit Airlines charges for carry-on bags.

Locking in a fare. Pay a fee to hold a ticket for up to seven days without purchase while you decide if you want to go. Continental now offers this option.

Another potential fee would be for a first checked bag on international flights. Those bags are now free.

With Southwest's acquisition of AirTran, four U.S. airlines - United, Delta, American, and Southwest - will account for about 80 percent of industry traffic, wrote Deutsche Bank Securities Inc. airline analyst Michael Linenberg.

"We may see another merger - US Airways and American, or Frontier and American, or Frontier and US Airways," Hobica said. "US Airways is dying to merge with somebody. That would give them more pricing power."

Contact staff writer Linda Loyd at 215-854-2831 or lloyd@phillynews.com.

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