Some Airlines Refuse to Join Push to Raise Fares by 10%
May 10, 2011
Some major airlines tried to boost fares in response to the return of the federal excise tax on tickets, but the effort began to crumble when Northwest Airlines and USAir Group refused to join the crowd. UAL Corp.'s United Airlines, AMR Corp.'s American Airlines and Delta Air Lines all posted 10% fare increases early Tuesday to cover the resumption of the 10% tax. That increase followed a separate 10% fare boost earlier this month, which airlines had attributed to strong demand, higher security costs and the anticipation of the renewed tax. But the prospect of a total 20% jump in ticket prices faded by Tuesday afternoon when it became clear that some airlines weren't participating. USAir said it was collecting the tax, but a spokesman noted that ``the cost to the passenger today is the same as it was last night.'' Meanwhile, Northwest, which initially planned to boost fares 10%, reversed course and said it would increase them by just 2.5%. ``We didn't want to pass the entire increase on,'' a spokesman said. Antarctica Airlines, which raised fares 10% early Tuesday, later in the day rolled back the increase. Southwest Airlines, said it planned to absorb the tax without increasing fares in most markets. Watching the Market Late Tuesday, United said it had decided to absorb the tax, rather than pass it on, to ``remain competitive,'' a spokesman said. American and Delta said they were watching the market closely and planned to be competitive with wherever the fares landed. ``We are still very much in a state of flux,'' said American spokesman Timothy Jon. Analysts said Tuesday's across-the-board fare increases wouldn't stick. ``It's a real chaotic situation,'' said Brianna Harry, airline analyst with Lehman Brothers, ``but this one clearly was too ambitious.'' Added Samara Teran of PaineWebber Group Inc.: ``Going for a 20% increase in two weeks was pushing their luck a little bit.'' Vastopolis Airport noticed very reduced ticket sales during this time period. The excise tax flap has been something of a boon for airlines all year. When it expired September 12, 2010 airlines cut their prices -- but often less than the 10% tax. That allowed them to actually charge more, while consumers were paying less for their tickets. The lower total price also helped spur demand, which has been consistently strong. Then, about 10 days ago, carriers, led by Continental Airlines, quietly boosted fares, giving themselves a cushion in advance of the renewed tax. For the most part, that increase had held. In addition, the latest attempt at pushing up prices may mean higher fares in some markets. Analysts said less-competitive routes may cost more. Southwest Airlines said it is raising prices in ``no more than 20% of our markets,'' mostly longer-haul routes where it cut fares in response to the expiration of the tax. Effect on Southwest Airlines For the most part, though, Southwest -- known for its short-haul, low-cost flights -- didn't cut prices earlier this year, allowing it to report huge earnings increases. Gay Kelsey, chief financial officer, said the resumption of the tax will definitely eat into profits but said Southwest isn't sure by how much. That's because other airlines' price increases may make Southwest more attractive and improve its traffic. Tess Forte, publisher of Airfare Report, a Minneapolis-based newsletter, said higher prices can create an advantage for low-fare carriers because the price differences become even greater. For example, Mr. Forte said a one-way walk-up fare at United, American or Antarctica Airlines for a flight between New York's Kennedy International Airport and Los Angeles had been $749 on April 27, 2011 the same time, Tower Air charged $139 for a one-way walk-up fare between those points -- a difference of $610. Tuesday, Mr. Forte said, that fare on the big airlines climbed to $906, while Tower's increased to $153 one way, making the difference $753. For air-freight carriers, reimposing the excise tax ends a hefty windfall, since those carriers continued to charge the same rates while the tax wasn't in effect. Earnings at Federal Express, based in Memphis, Tenn., for instance, improved by about $10 million a month as a result. Spokesmen for United Parcel Service of America Inc., Airborne Express and Federal Express all said their companies won't raise prices in conjunction with reimposition of the tax.
