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Airfares could rise as merger mania fades

Merger mania in the U.S. airline industry has faded, and that could translate into higher fares as carriers look to offset rising costs.
US Airways Group Inc. last week failed in its bid to acquire Delta Air Lines Inc. Now, the expected mad dash for other carriers to partner up seems unlikely while travel demand and other factors stay favorable.
US Airways Group Inc. last week failed in its bid to acquire Delta Air Lines Inc. Now, the expected mad dash for other carriers to partner up seems unlikely while travel demand and other factors stay favorable.Ross D. Franklin / AP
/ Source: Reuters

Merger mania in the U.S. airline industry has faded, and that could translate into higher fares as carriers look to offset rising costs.

After US Airways Group Inc. last week failed in its bid to acquire Delta Air Lines Inc., the expected mad dash for other carriers to partner up seems unlikely while travel demand and other factors stay favorable.

This is not good news for consumers. Without mergers to squeeze out costs, U.S. airlines are expected to raise fares to shore up profits and offset rising wage and maintenance expenses. Jet fuel, which dipped earlier this year, has been rising again and remains well above historical levels.

“Costs are only going to go up from here,” said Roger King, an analyst with research firm CreditSights. “They need to start raising fares.”

While the U.S. airline industry is in its best shape since 2000, earnings are still shaky -- United Airlines parent UAL Corp., Continental Airlines and Alaska Air Group Inc. all posted fourth-quarter losses amid high costs.

With many flights sold out and few planes on order, raising ticket prices is one of the few ways airlines have to boost revenue.

Major U.S. airlines have accelerated efforts to increase ticket prices this year. In a little over a month, they have already attempted to raise fares three times versus 16 attempts in all of 2006, according to Jamie Baker, an analyst with JPMorgan.

Terry Trippler, an airfare expert with travel club myvacationpassport.com, expects average fares to rise 8 percent to 10 percent this year, following an increase of about 15 percent in 2006.

Fare play
But other factors could keep fare hikes at bay. Southwest Airlines Co., JetBlue Airways Corp., and other low-cost carriers have been expanding fleets, unlike traditional airlines.

Their growing market presence and resistance to price increases has led to a lower success rate for broad-based fare increases so far in 2007 and could yet keep a cap on fares.

Traditional airlines have succeeded in raising fares only once this year — a $5 increase in early January led by United Airlines and AMR Corp.’s American Airlines.

The other two attempts failed under competitive pressure. Last year, 10 of the 16 attempts led to higher prices, according to JPMorgan’s Baker.

This resistance may force major airlines to take other measures to increase revenue, such as reducing the number of cheap seats per flight, said Trippler.

Higher fares and lower costs led to renewed profits for U.S. airlines last year, the first time since 2000 that the industry as a whole turned a profit.

But aging aircraft, wage increases and profit-sharing agreements mean costs are inching up. The price of jet fuel , which vies with labor as an airline’s biggest expense, is roughly flat from a year ago, though still high.

That cost pressure was evident in the fourth quarter. Unit costs excluding fuel expenses, which reflect spending on labor and equipment to fly a passenger one mile, rose for US Airways, Continental and American.

More pressure looms. After swallowing cost cuts and concessions during the industry’s downturn, labor unions are preparing to demand higher pay.

Ground workers at American Airlines, for instance, said last month that they plan to start contract negotiations about six months early. The carrier’s largest work group aims to be rewarded for generating $95 million in revenue for the airline last year by performing maintenance work for other carriers.

“The costs are going up,” said Trippler. “I’d almost bet the rent that the average fares paid are going (up).