The high price of flying

www.nashvillecitypaper.com Commentary by Doron Levin   The prospect of a U.S. war with Iraq is driving up jet-fuel prices, hurting the already weak finances of major U.S. air carriers and spurring them to try their own price increases. Since mid-November, the price of jet fuel has climbed to a peak of more than $1.20 a gallon from about 70 cents, the latest increase reflecting an oil depot fire on Staten Island, N.Y. and strikes in Venezuela. A penny increase in jet fuel costs the U.S. industry $180 million a year. The second-biggest expense after employee costs, higher fuel prices are a heavy burden on the finances of major carriers already weighted down by bloated union contracts and other expenses. It’s hard to determine, though, which is more debilitating: billowing costs or plummeting revenue. The major carriers are conflicted. On one hand they are trying to keep ticket prices affordable to attract travelers back to the skies and from low-cost carriers. On the other hand they are desperate to maintain cash flow and not fall prey to bankruptcy, as UAL Corp., parent of United Airlines Inc., and US Airways Inc. have in recent months. In February, Continental, the fifth-largest U.S. carrier, raised round-trip ticket prices $20, saying the move was designed to mitigate rising fuel prices. American and US Airways Group Inc. quickly matched Continental. Northwest Airlines Corp. decided to match only on some of its lowest fares. Three days later, Continental, American and US Airways, seeing that their increase wasn’t matched fully, restored their earlier fares. Two days after that, ATA Holdings — a low-cost carrier — raised some prices $3 in each direction, a move matched by United, American and Northwest on competing routes. By the end of the month, Northwest, Continental, American and two other majors again raised fares $10 in each direction on many routes, citing rising fuel costs. Whether the latest increase holds likely will depend on passenger traffic. Just as in the automobile business, where overcapacity has caused falling car and truck prices, airline ticket prices suffer because there are too many seats and not enough travelers to fill them. Rising and falling fares are the airlines’ version of appearing and disappearing rebates on cars. Following steady price increases in the 1990s, airline revenue averaged 14.34 cents per mile in 2001, according to the Air Transport Association, a trade group for U.S. carriers. That number fell to 13.12 cents per mile in 2001 and to 11.93 cents last year. The preceding numbers represent revenue to the airlines, not including fees and taxes. If tickets seem as expensive as ever, that may be because they reflect more taxes and fees than ever. In 1972 about 7 percent of the price of a ticket was for tax and airport fees. Twenty years later it was 15 percent; last year it climbed to 26 percent. In other words, now an airline pockets only $149 of $200 in airfare. For the person or business buying the ticket, however, it’s still just expense. “The reason for weak demand isn’t just competition and too much capacity,” said John Heimlich, the trade group’s director of economic and market research. “Tons more people are driving because you can communicate better from cars. Substitutes for meetings like videoconferencing are better than ever.” The major carriers want nothing more than to introduce a broad price increase that travelers will accept, but they seem to differ on how to do it. Northwest, based on its tactics, appears to favor increases mostly on the lowest discount fares, while major competitors try across-the-board raises. Low-cost carriers like JetBlue Airways Corp. insist they are committed to maintaining simplified low fares, despite rising fuel costs. Fuel prices, though troublesome, have been higher. Prior to the Persian Gulf War in 1991, jet fuel prices peaked above $1.40 a gallon; within a year they had returned to the neighborhood of 70 cents a gallon. It’s a good bet, with economies weak worldwide, that a short conflict in Iraq will be followed by falling energy prices and some relief for airlines. What’s far less clear is that the major carriers have found a way to price air transportation that keeps them solvent without thoroughly confusing their customers. Doron Levin is a columnist for Bloomberg News. Editor’s Note: Tom Neff is out of town this week. His column will return next week.