=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2004/03/29/f= inancial1704EST0265.DTL --------------------------------------------------------------------- Monday, March 29, 2004 (AP) Discount carriers thwart fare hikes by big rivals SUSAN CAREY, The Wall Street Journal (03-29) 14:04 PST (AP) -- Discount airlines are holding sway over the pricing of air fares as never before, blocking major carriers desperate to raise ticket prices so they can recover sky-high fuel costs. With fuel at a 13-year high, airlines have made at least 12 attempts to boost airfares in the past 2 1/2 months alone. But most of the efforts have failed to stick, and increasingly the spoiler has been one or more budget-price airlines, which see a chance in the current squeeze to extend their market shares. For travelers, this change in pricing power could affect everything from ticket prices to the financial viability of the big airlines they use to whether they must continue to endure unpopular restrictions, such as Saturday-night-stayover requirements, to get low fares. In late February, Continental Airlines raised all its fares for travel in the U.S. by $5 one-way. It blamed historically high fuel prices -- and noted that its passengers last year had paid the lowest fares since 1994. "This fare increase is a step toward matching fares with the cost of providing air travel in this environment," Jeff Misner, the chief financial officer, said at the time. AMR Corp.'s American Airlines, UAL Corp.'s United Airlines and Delta Air Lines immediately boosted fares in kind. But Northwest Airlines joined only in some lower-fare markets. And a number of budget carriers, including Southwest Airlines, AirTran Airways, Frontier Airlines and America West Airlines, didn't follow suit, and the effort fizzled. Once merely dabbling on the fringes and stealing some of the major airlines' leisure travelers, budget carriers have gained a critical mass in the market -- and, as a result, much broader pricing clout. Low-cost airlines together now control fully a quarter of domestic air capacity and fly in the highest-demand markets, from New York to Chicago to Los Angeles, where they have effectively repriced about half the industry's domestic revenue. Their seats are available to 70 percent of domestic fliers and their thrifty fares are easy to find and book on the Internet. J.P. Morgan, in a survey of new jet orders, estimates the discount group will boost its collective domestic fleet by 250 planes to more than 1,000 by 2006. The 2,500 planes in the domestic fleet of older, so-called hub-and-spoke airlines, by contrast, is hardly expected to budge. And as the budget airlines grow, they increasingly compete with each other, exerting more downward pressure on fares. The big airlines have been reeling since 2001, together posting billions of dollars of losses due in part to constricted demand and their higher cost of operations. Despite energetic cost-cutting, the major carriers remain plagued by complexities that go along with having 70 or more years of history. They have senior work forces compensated at the top of union scale. They have multiple kinds of planes, adding expense to training, maintenance and spare parts. They operate big hubs, which are costly in terms of real estate, staffing and flight delays. US Airways Group Inc., the high-cost carrier among the majors despite a quick spin through bankruptcy-court protection last year, says it costs 10 cents to fly a seat a mile, excluding fuel. American and United are trying to drive down their costs into the eight-cent-per-mile range. But JetBlue Airways and Southwest spend six cents or less to fly a seat a mile. That gap is killing the big carriers. "There used to be a parallel universe: the high-fare set and the low-fare set," said Stan Hula, vice president of planning at low-fare ATA Airlines. "The majors always matched low fares, but they tried their best not to sell them" in large numbers by tying them up with Saturday-night stays or ruthlessly limiting the inventory available at the lower fares. Of course, the smaller carriers have to pay the higher fuel costs, too, and have led fare increases of their own. AirTran raised its prices two times in as many months and it was matched by everyone but fellow discounter Southwest. Spirit Airlines led an increase in late January that succeeded in some markets, and ATA was the leader of a March 3 effort to nudge up cheaper ticket prices. Early last week, ATA struck again by boosting its "fuel surcharge" to $15 from $10 one-way. As of late last week, five of the major airlines had matched that rise where they compete with ATA. On Friday, Continental expanded that $5 increase to nearly all of its fares in the U.S. and to Canada. American, US Airways, Delta and United quickly followed. Northwest, long the spoiler among the big carriers, matched the increase only on discounted fares in domestic markets where it competes with Continental. "Raising business fares won't increase revenue," Richard Anderson, Northwest's chief executive, said at an industry conference earlier this month. "Those fares are already very high." The discounters "are the ones who lowered the fares in the first place," said Bob Fornaro, president of AirTran. "If the price-setters want to raise fares a few bucks, the majors will follow." Antitrust laws prohibit airlines from talking to each other about pricing intentions. So they play a cat-and-mouse game by posting new fares on their Web sites and through computer-reservation systems used by travel agents and Internet travel firms. Typically, one airline will raise its prices late in the week and see if its competitors match. If there are any holdouts by Monday, all the carriers will roll back the boost to stay competitive. After the 2001 terrorist attacks, the major airlines cut capacity. As a result, they have been flying fuller airplanes. But demand generally hasn't returned to the go-go levels it reached during the late 1990s, and many fliers who have returned to the skies are buying much cheaper fares. Northwest, for one, says its revenue last year matched that achieved in 1996. One bright spot for the big airlines is growth in international traffic. In the late 1990s, the network airlines pushed through many increases, raising their highest unrestricted fares to $2,000 or more for a round-trip coast-to-coast flight. According to American Express Co., the average one-way domestic fare paid by its customers peaked in 2000 at $311 after increasing annually for six years. That figure has declined each year since then, falling to $276 in 2003. Behind that price erosion is a weak economy; the movement of business travelers to cheaper, restricted tickets; and the growth of Southwest and its imitators. When America West started nonstop flights between New York and Los Angeles last October, the one-way walkup fare fell to $464 from $1,233, according to J.P. Morgan. When AirTran started flying Baltimore-Dallas trips in November, the one-way unrestricted fare fell to $392 from $872. Strapped with much higher costs than those of discounters, US Airways sa= ys that 70 percent of its domestic flying last year was unprofitable. Its average one-way domestic fare last year, $125, was 11 percent below 2000. "If we could charge more money, we would," David Siegel, the chief executive, said last week in a speech to employees. "But passengers want low fares." Delta's chief executive, Gerald Grinstein, also recently complained that traditional carriers have little pricing power, compared with the newer airlines. "One (price increase) stuck, but it wasn't started by a network carrier," Mr. Grinstein lamented. "It was started by AirTran," Delta's rival in Atlanta. Delta-led price increases have failed four times since Jan. 16, foiled sometimes by its big competitors and other times by the discounters. "The low-fare carriers are, as a group, now playing a role that Southwest pioneered: the price policeman," said Keith Taylor, Southwest's vice president of revenue management and pricing. And in the main, he says, the group's pricing power "is downward." Fare watchers predict the major airlines won't be able to make broad fare increases stick like they used to. Experts also think the Saturday-night-stay requirement on discounted tickets will disappear. Most budget airlines don't have it and two hub-and-spoke carriers, America West and Alaska Airlines, have dumped it. Terry Trippler, a fare watcher for Cheapseats.com, said that west of Denver "the Saturday-night stay has pretty much collapsed." He thinks the collapse will spread east this summer. Experts believe this could be the year in which the big airlines finally jettison their complex pricing structures, which can offer as many as 50 individual fares in a given market. Alaska Airlines recently revamped its complicated system, reduced the number of fare types it offers and narrowed the difference between its highest and lowest fares. Hurting the industry's ability to raise fares is the fact that the big airlines are putting more seats back into the skies to battle the rapid expansion of the budget airlines. According to Deutsche Bank Securities, the nation's nine largest airlines offered nearly 8 percent more capacity in February than a year earlier. Capacity is expected to grow by nearly 6 percent for all of 2004. ---------------------------------------------------------------------- Copyright 2004 AP