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Another "Fuel Surcharge"


United, Continental boost airfares

Mar 16, 2008

United Airlines and Continental Airlines increased fares as much as $50 per round trip Thursday and Friday as jet fuel rocketed to a record $3.03 per gallon this week and the airline industry and consumers alike wondered how high is up.

It is the largest single domestic fare increase since the terrorist attacks of Sept. 11, 2001, and, if other major airlines follow suit, it applies even more economic pressure on an industry that was recovering rather nicely but has met serious headwinds.

"Three-dollar-plus jet fuel does not make cheap fares economically viable," said Henry Harteveldt, an airline analyst at Forrester Research in San Francisco.

United went first, posting its fare increase Thursday night, then Continental matched it Friday. Spokesmen for other carriers, including American Airlines and Delta Air Lines, said Friday that they had taken no action but were studying the matter.

"The cost of fuel continues to rise," said Robin Urbanski, a spokeswoman for Chicago's United Airlines. "We must be able to pass along costs just like any other businesses do."

"We are seeing record-high fuel costs, and a fare increase can help bring revenue closer into alignment with our expenses," said Continental Airlines spokesman Dave Messing, in Houston.

Fuel prices have been on a tireless upward march since 2003 and went into a sprint this week, as the price of jet fuel jumped 5 percent. The same 42-gallon barrel of jet fuel that cost $139.06 on Thursday cost $75.18 the same day a year ago, said Tim Smith, a spokesman for American Airlines in Fort Worth, Texas.

Put another way, every $1 increase in the cost of a barrel of crude oil means almost $470 million in additional expense to the U.S. airline industry, said Elizabeth Merida, a manager at the Air Transport Association, representing the major airlines, in Washington.

The airline industry has been staggering under the weight of energy prices that have continued to rise, but so has airline demand. Analysts and airline executives acknowledge that the day may come, if a recession hits, when businesses in particular will significantly curtail travel.

"United has thrown down the gauntlet for this particular increase," said Rick Seaney, chief executive of FareCompare.com, an airline ticket research Web site in Dallas. "I have been predicting air travel consumers are in for a wild ride on airline ticket prices this year and I think we just reached the top of the highest point on this roller coaster," Seaney said Friday.

He said air travel will simply "start to slow down if there is this continued fare increase week after week after week."

As a practical matter, said Forrester Research's Harteveldt, the airlines' route schedules may look different in coming weeks as they possibly trim cities or routes that are less profitable, as well as ground less fuel-efficient airplanes.

This week's increase is the fourth in as many weeks by the major airlines - the others in the form of fuel surcharges, not in the base airline fare, although there is no difference to consumers - in the struggle with climbing fuel prices.

Most other fare increases have been in the $10 range. This particular increase is based on the length of the flight, said United spokeswoman Urbanski. Fares for flights of less than 500 miles were increased from $4 to $10 round trip. On longer flights of 1,500 miles or more, fares increased from $12 to $50 round trip.

To put costs in context, Urbanski said the cost of filling United Airlines' largest airplane, a Boeing 747, for a 16-hour flight from Chicago to Hong Kong is $173,000.

Fuel surpassed labor as the airlines' largest cost in the last year or two and the climbing price likely won't hit a ceiling for some months, said Brian Milne, editor of DTN MarketWire, a news service for the wholesale fuel market, in southeastern New Jersey.

He said DTN believes crude will reach $115 per barrel in a window from now through August and possibly remain in that range for some time, based on the market's belief that supply is tight.

Meantime, there are differing opinions on whether other airlines will match the fare increase lead of United and Continental. Seaney, of FareCompare.com, says the increase "has some stickiness to it" that will trap the others.

Joe Brancatelli, who writes Joe Sent Me, a Web-based newsletter in New York for business travelers, said, "I don't think it will hold up. Big-gulp things have a tendency not to work. I think this will stick, but only with increases of a few dollars, not $50."

He added, "They have a tough time of pushing increases of $5 at a time. Why do they think $50 will work?"

He said United Airlines "has been consistently wrong on fuel prices" since the airline came out of bankruptcy in February 2006. At the time, he noted, United had a five-year plan with oil at $50 per barrel. In addition, United has not sufficiently "hedged," or contracted for advanced purchase of fuel at a fixed price for future delivery.

"United was wrong when they came out of bankruptcy and wrong on hedging and continues to pay exorbitant pay to executives. These people are fools. They are to blame for the problems, not the oil markets."

sfgate.com

United, Continental boost airfares
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