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Airline Industry

With travel market stabilizing US carriers raise fares

Jun 25, 2009

Major U.S. airlines Thursday raised fares across parts of their domestic networks, the second hike in as many weeks amid signs that the travel market is stabilizing.

American Airlines, a unit of AMR Corp., and UAL Corp.'s United Airlines late Wednesday added $10 and $20 to roundtrip fares, on top of a similar industry-wide increase two weeks ago. By midday Thursday, other U.S. carriers joined the latest round of fare increases, although low-cost carriers, including Southwest Airlines Co. didn't raise fares.

The increases came as the International Air Transport Association said Thursday that passenger demand in May fell 9.2% from the previous year, a greater decline than 3.1% in April but better than the 11.1% year-over-year drop in March.

Results reflect not only the global recession but fears this spring over the spread of the A/H1N1 influenza virus. In Mexico, the country hardest hit by the flu, carriers saw air traffic fall by about 40% in May.

While U.S. airlines responded quickly by cutting seat capacity to match falling demand, they've joined world airlines in reporting sharp revenue declines. "We may have hit bottom, but we are a long way from recovery," said Giovanni Bisignani, head of IATA, the airlines' world trade group. "After a 20% fall in international passenger revenue in the first quarter, we estimate the drop accelerated to as much as 30% in May. This crisis is the worst we have ever seen."

Already weak from the global financial downturn, air traffic has taken a sharp hit from fears that the virus was spreading from Mexico to the rest of the world.

Delta Air Lines Inc., the world's largest airline, said this week that worries over the virus, also known as swine flu, would cut second-quarter revenue by $250 million, as the airline slashed service to Mexico, Latin America and Asia. Delta said it expects to restore some of that capacity during the remainder of 2009.

Fitch Ratings on Thursday downgraded Delta's debt rating to B- from B, with a negative outlook, due to "continued erosion of the airline's near-term cash flow generation potential, that has resulted from extremely weak business travel demand and large year-over-year declines in passenger revenue." Analyst Bill Warlick wrote in a report that, despite "intense revenue pressure" Delta has better liquidity and maintains cost advantages over rivals UAL, AMR and US Airways Group Inc. (LCC), which Fitch rates at CCC. Northwest Airlines, a wholly owned subsidiary of Delta, also was cut to B- from B. Fitch now expects major U.S. airlines with exposure to international business travel to see 2009 passenger revenue fall in a range of 10% to 15%, compared with the previous year.

American and Continental Airlines Inc. have said they continue to cut seat capacity to keep pace with weak passenger demand, as both business and leisure travelers curtail their plans.

Those who have bought tickets this year have gotten some good deals. Airlines repeatedly cut fares this spring, even as their costs, especially for fuel, have been rising. But "the pace of domestic airfare sales has dried up recently," said Rick Seaney, who tracks U.S. air fares on the Web site.

"I have been cautioning consumers for the past month that they procrastinate on purchasing airline tickets at their own risk - two airfare hikes in the past few weeks is the strongest signal I have seen that the bottom is either here or near," Seaney said.

Seaney added that the latest fare hike "does tiptoe around popular low-cost airlines' routes (Southwest, AirTran, JetBlue), while a few remaining sale airfares in the marketplace have been spared."

With travel market stabilizing US carriers raise fares
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