3 major airlines raise fares - The $20 increase on round-trip tickets is a move to re-establish pricing power

www.bayarea.com Posted on Sat, Feb. 15, 2003 By Edward Wong NEW YORK TIMES

Three top airlines increased nearly all their fares by $10 each way on Friday.

The move, the most significant fare increase for the industry since last summer, was an effort by the companies to re-establish pricing power as fares have hit record lows. But several industry experts raised doubts that the airlines would be able to keep the higher fares. With a war in the Middle East looming, travel has continued to slump, they say, and it will only become worse if the United States attacks Iraq.

The three airlines -- Continental Airlines, American Airlines and US Airways -- will also have to see whether their other top rivals decide to match the increase. If those companies -- Delta Air Lines, Northwest Airlines and United Airlines -- do not raise their fares, then the other carriers will probably have to back down.

People in the industry are watching Northwest in particular, because it did not go along with several fare increases last year, forcing its rivals to return to lower their fares.

Continental Airlines, the country's fifth-largest carrier, was the first to put the fare increase into effect on Friday morning.

"Although the airline industry is suffering from overcapacity and weak demand, this fare increase is necessary to get Continental back on the path to financial recovery," the company said in a statement.

Continental said the increase was necessary to help offset "dramatically higher fuel expenses."

American soon matched the increase, and US Airways had jumped on board by late afternoon, said Terry Trippler, an air fare expert.

Fuel is the second-highest expense for airlines, behind labor costs. In the past year, fuel prices have spiked, because of the oil crisis in Venezuela and tensions with Iraq, said John Heimlich, an economist for the Air Transport Association, the industry's main trade group. All the big airlines have a certain amount of their fuel hedged in case of the price of oil goes up, but they have not been able to avoid paying higher prices on the average.

The spot price for a gallon of jet fuel is now $1.20, more than double the 57 cents a year ago, according to the trade group. The price for West Texas intermediate crude oil is expected to be $34.25 a barrel this month, compared with $20.65 a year ago.

In December, airlines paid an average of 77.4 cents a gallon for jet fuel, up from the 60.1 cents they paid in December 2001.

The cost of crude oil, and thus jet fuel, will almost certainly go up if the there is a war in Iraq.

Even so, there is no guarantee that the fare increase will remain, experts said. That will depend on the market conditions for air travel, which are dismal right now. Furthermore, they said, carriers with relatively good cash reserves, like Northwest, can better afford to keep fare prices lower than some of their competitors.

"The airline industry needs it," Michael Boyd, an airline consultant based in Evergreen, Colo., said of the price increase. "Whether it'll stick is another issue. With war jitters out there and other things, I don't know whether it'll stick."