Airfares may not join oil in soaring to the heavens

Northwest planes are lined up at their gates.
Northwest planes are lined up at their gates at the Minneapolis-St. Paul International Airport.
Craig Lassig/AFP/Getty Images

Joan Mero of Inver Grove Heights, Minn., doesn't like where she sees airfares headed. She and her husband have a timeshare in Cancun, Mexico.

Last week, she was scoping out nonstop fares, and they all cost about $600. That's about 50 percent more than she expected to pay. She hopes fares fall, not just for her husband and her, but also for her daughter and grandchildren.

"Our daughter and husband and three kids come down, and if the air goes crazy, they'll never be able to afford to come down and visit us in Cancun," she said.

But Mero and her family have time on their side. Airlines often fail when they try to hike fares.

While some fare hikes are sticking, others aren't. And some fares hikes that have taken hold so far could evaporate as airlines try to fill seats that look like they could go empty.

Sometimes there's very little rhyme or reason to what the airfare might or might not be, even with high fuel costs.

[Airlines] have to discount the fares to stimulate demand to get people on the airplanes.

George Wozniak, owner of Hobbit Travel, notes that while the big carriers were announcing fare hikes last week to cover fuel costs, some other airlines were running fare sales.

Both US Airways and AirTran, for instance, were offering round-trip fares out of the Twin Cities for about $200 or less.

"They're the lowest we've seen probably in the first quarter. And you know fuel has never been higher," Wozniak said.

Chances are airlines won't come close to hiking fares as much as they want.

If they boost fares too much, they risk flying empty seats, and they get no money out of those seats. In addition, raising fares also risks a loss of market share to competitors who opt not to hike fares. That's especially true as the economy weakens and the demand for air travel declines.

Peter Belobaba, manager of MIT's Global Airline Industry Program, said competition can keep airlines from raising some fares, even a little bit, despite the fact airlines are taking at the gas pump.

A Northwest ticket counter at MSP
A Northwest ticket counter at MSP
MPR Photo/Jeff Horwich

"The lowest fares out there are not enough to even cover the costs of the fuel for the big airplanes," Belobaba said. "It might be difficult to put a $10 or even $20 increase on the lowest fares in the market, because those fares are targeted at price-sensitive leisure passengers. If you're not competitive at that level, then you will lose market share."

So, who can airlines hit with fare increases? Belobaba said business travelers are prime targets.

"Top-end fares clearly are targeted at business travelers who are booking closer to departure, who need the flexibility and are less sensitive to these price increases. If an airline needs to raise fares, it certainly might be easier to do that at the higher end, to tack $50 on an $800 fare than to tack even $10 on a low-end fare," Belobaba said.

Eagan-based Northwest has been trying to boost fares to offset what looks like a nearly $2 billion hike in fuel expenses this year. Spokeswoman Tammy Lee said the results have been mixed. She said competition keeps the airline from passing along all its increased fuel costs.

"We have been able to increase fares slightly in some markets, but not all markets across the board. It's a tough decision to make. Obviously, you want to do what's right by the consumer. But at the same time you're stuck with the vexing challenge of high fuel costs," Lee said.

Fuel is a challenge as well for the Twin Cities' other hometown airline, Mendota Heights-based Sun Country Airlines. It looks like that airline's fuel costs are on track to jump by about $50 million this year.

Sun Country CEO Stan Gadek said there are too many seats chasing too few customers.

"So for airlines to be able to [sell] those seats, they have to discount the fares to stimulate demand to get people on the airplanes," Gadek said.

Many airlines are trying to reduce the supply of seats on the market. They're reducing their flying and shifting to smaller planes. The thinking is that fewer seats will give airlines more power to raise prices.

But Gadek said airlines are once again talking about their very survival.

"Every airline in this business is having the same conversation we're having right now. That is how do we survive in an environment of $110 barrel oil and an environment where we have a limited ability to pass on these costs to customers," Gadek said.

One Wall Street analyst recently forecasted that the industry could lose up to $9 billion this year, largely because airlines can't get passengers to pick up higher fuel costs.

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