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US Airlines Hope To Keep Raising Ticket Prices March 1, 2006

Posted by notapundit in Economic News, Main, US News.

CHICAGO (Dow Jones)–Flight cutbacks at some major U.S. airlines, including bankrupt carriers Northwest Airlines Corp. (NWACQ) and Delta Air Lines Corp. (DALRQ), have helped airlines raise domestic air fares by an average of about 8% this year, a trend they hope to continue.

Airlines can’t talk about specific plans to raise ticket prices, due to concerns related to antitrust laws. But carriers will try for further fare hikes this spring as seats get more scarce. Strong passenger traffic, along with better ticket pricing, should put the airline industry back in the black in 2006, recovering from the long downturn following the attacks of Sept. 11, 2001.

Calyon Securities analyst Ray Neidl said he’s staying conservative about capacity cutbacks this year. He expects U.S. capacity to be flat or down 1% at the end of 2006.

But, he said, airlines this spring will test ticket price hikes, especially in markets served by Delta and Northwest. The only worry, he said, is the high price of jet fuel, the biggest single cost for most airlines. So far this year, fuel prices appear to be stabilizing, following a huge run-up in 2005.

At an airline investor conference last week, David Neeleman, chief executive of JetBlue Airways Corp. (JBLU), and Laura Wright, chief financial officer of Southwest Airlines Co. (LUV), said their airlines’ plans include raising ticket prices to cover higher costs. In recent years, those airlines have led the charge for cheap tickets.

Southwest Airlines could be an industry driver for fare increases, Neidl said. In the past, Southwest could afford lowball ticket pricing because its hedges on the rising price of fuel gave it a tremendous cost advantage over competitors. But those hedges are beginning to expire. Over the next five years, said Wright, the CFO, Southwest plans to cover rising jet fuel costs with a gradual increase in fare prices.

Fast-growing JetBlue has built its business by offering low fares. But having just reported its first quarterly loss, due to higher costs and more competition, the airline’s best opportunity is to increase revenue by fine-tuning ticket prices, Neeleman said. The six-year-old airline is just beginning to address the complexities of yield management – the process airlines use to generate the strongest possible revenue from ticket sales. “We probably priced too high on the top end, and too low on the bottom end,” Neeleman said.

JP Morgan analyst Jamie Baker sees a big opportunity for JetBlue to grab Delta customers. “We believe Delta’s cuts are of sufficient magnitude to afford JetBlue a small annual profit,” the analyst wrote Tuesday.

Delta has eliminated some flights between the Northeast and Florida, the major markets for JetBlue.

Baker has a neutral rating on JetBlue shares, which he doesn’t own. JP Morgan has a financial relationship with the airline.

Major airlines have said their costs will never be as low as their low-cost rivals. To counter that, they plan to add revenue by offering premium services, such as first-class seating and airport clubs, appealing mainly to business travelers who don’t mind paying more.

Still, traditional airlines do look more like their low-cost rivals now. Down the road, industry executives expect to see code-sharing – allowing passengers to buy tickets on one airline for connecting flights on another – between low-cost and traditional airlines, to link domestic feeder flights with international routes.

Historically, when ticket pricing firms up, airlines begin adding capacity to gain market share; then competition brings fares down. This time, though, there’s an underlying trend that may keep capacity in check. To save money, airlines are turning to smaller, more cost-efficient planes.

“The size of domestic aircraft will decline this year, by 1.4 seats,” according to study by the Federal Aviation Administration. “Legacy carriers continue replace their wide-body and larger aircraft with smaller, narrow-body planes. Additionally, demand for 70-90 seat aircraft will continue to increase, which furthers the decline in the overall number of seats per aircraft,” the report said.

While that’s good news for aircraft makers Boeing Co. (BA) and Airbus (ABI.YY), they’ve already increased production to accommodate a record number of aircraft orders in 2005. So, there’s expected to be a shortage of narrow-body aircraft for the next few years, limiting airlines’ growth.

In the FAA forecast released Tuesday, which covers fiscal years 2006 through 2017, the government agency said it’s optimistic about the commercial aviation sector. In the past five years, the industry has survived 9/11, the epidemic of Severe Acute Respiratory Syndrome (SARS), and skyrocketing jet fuel prices.

The FAA said it expects domestic airline capacity to shrink 0.7% this year, with revenue per passenger seat-mile, an industry yardstick to measure income, rising 0.2% in 2006.

Last year, U.S. airlines carried a record 739 million passengers, up from 690 million in 2004.

“U.S. commercial aviation remains on track to carry one billion passengers by 2015,” the FAA said. “In addition, international traffic is growing almost 2% faster than domestic traffic.”

“In the long run, inexpensive tickets, a strong national economy, and increasing demand for seats aboard aircraft should bode well for the industry and consumers,” the FAA said.

Only one thing can stunt the growth of air traffic, the FAA said. “The remaining formidable hurdle for the commercial aviation industry as a whole will be the price of oil.”

By Ann Keeton, Dow Jones Newswires


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