The airline industry has been looking a lot like a season of Survivor lately. For those of you just tuning in, let's recap what's happened so far: Five U.S. airlines went bankrupt in less than a month and four of those completely shut down. Delta and Northwest announced on April 14 their intentions to merge into one mega carrier after decades of independence, and now some of the other legacy carriers seem frantic to find partners of their own. As for consumers, this year the airlines have hit us with one added fee after the next and have tried to hike fares 14 times.
What gives? In a word, oil. "What we're facing now with oil prices is a situation none of us ever expected," says Darryl Jenkins, a long-time industry consultant. "The old days are long gone and it's going to get quite a bit a worse."
With jet fuel now hitting $145 a barrel, an almost 80 percent increase over prices last year and a whopping 280 percent higher than prices in 2003, the airlines are facing an unprecedented financial crunch. For the first quarter of this year, all the legacy carriers and most of the low-cost carriers (except Southwest) reported net income losses ranging from $8 million to $6.4 billion.
That means leisure travelers face higher fares, more fees, fewer flights, and little hope for quality improvements. Travelers won't be totally powerless however, and I'll share some tips on what you can do to minimize or avoid some of the negative impacts.
Paying the gas bill
April 22, Delta's CEO Richard Anderson said airfare needs to go up by 15 to 20 percent in order for the airlines to break even on fuel costs. Analysts say this is a bold statement, but most agree that big fare hikes are inevitable. "[Anderson] is right that airfares must go up, and go up by double digit percentages to cover the cost of fuel," says Henry Harteveldt, principal analyst at Forrester Research. "The era of cheap air travel is gone."
Rather than increase all fares, the airlines will likely achieve a 15 to 20 percent average increase by eliminating some of their lowest level fares altogether and placing a heavier burden on upper fare levels. (Airfare 101: In economy class, airlines sell essentially the same product at different fare levels. Generally, the lowest-cost fare levels go to passengers who either book early or snag a sale fare when the airlines want to fill empty seats.)
"The airlines will have to increase prices, but they can't raise everybody's fares 20 percent because many people will choose not to fly," says Bob McAdoo, a senior research analyst at Avondale Partners and a former airline CEO. "I don't think we'll see an end to deeply discounted seats, but the number available will drop, and some of the lowest-paying travelers are going to get left behind."
"The airlines will try to put the burden of increases on business travelers because leisure travelers aren't willing to pay much more than they already are," says Ed Perkins, a consumer advocate and SmarterTravel.com columnist. "So, we're seeing an increase in prices in the higher fare buckets and the imposition of old restrictions on the lower fare buckets, such as the Saturday-night-stay requirement and advance-purchase rules."
The good news is some experts think prices will be kept in check on routes served by low-cost carriers like Southwest.
Capacity cutting—trimming the frequency of flights on unprofitable routes, swapping larger planes for smaller planes with fewer seats, and cutting out routes altogether—is an easy way for the airlines to get the supply and demand ratio to move in their favor, so it's something travelers should expect. A JP Morgan report published on April 15 suggests "the industry needs to downsize anywhere from 15 to 20 percent in order to re-calibrate for profitability at current fuel prices."
"Probably about 90 to 95 percent of the domestic routes airlines fly are not profitable," says Jenkins. "So I expect a massive amount of domestic service will be cut."