Airlines eye higher fares after post-election travel surge

Major US airlines are eyeing the potential for higher airfares in 2017 after a boost in post-election corporate travel emerged as a bright spot in the fourth quarter.

On Friday, American Airlines became the latest carrier to point to an uptick in business travel after the US presidential election, with particular strength in the financial, industrial and entertainment sectors.

That helped American score higher on a closely-watched industry benchmark for revenue per available seat mile for the first time since the fourth quarter of 2014.

But American, like rivals United Continental and Delta Air Lines, signaled it sees challenges to profitability this year due to higher fuel and employee costs as it renegotiates labor contracts struck during the leaner 2006-2008 period.

In the fourth quarter, American's labor costs rose 17.4 percent to $2.8 billion. 

Carriers are hoping to turn to consumers for help in offsetting these costs.

United Continental president Scott Kirby said the pricing environment was "improving."

"It felt to me like there was an inflection point after the election," he told analysts on a conference call earlier this month. "Business demand got stronger virtually across the board."

"You combine that with a world where fuel prices are going up, and I think a lot of airlines then start raising fares." 

Delta Air Lines president Glen Hauenstein said customers in many business segments are in a different place compared with a couple of years ago.

"In this part of the economic cycle, with consumer confidence high, with consumers flush with cash, they are willing to pay for more frills," said Hauenstein, adding Delta could cut back "if fares become more relevant to customers."

- 'Backdoor fare increase' -

Talk of lifting fares comes as both American and United move ahead with new "Basic Economy" services, essentially a bare-bones service. 

At American, consumers who choose this option will receive a non-changeable, non-refundable ticket at the gate and will be able to carry one personal item but not granted space in overhead bins for carry-on bags.

If customers bring a carry-on bag that doesn't fit under the seat, they will be charged a $25 checked-bag fee plus a $25 service charge, American said. 

"Segmentation and getting a product and a price to customers at every stage of the demand curve," American president Robert Isom said in paraphrasing the concept during a conference call Friday.

United is launching a similar service this year. Delta already has a basic service and plans to introduce a new "Premium Select" service for extra space and amenities on international flights this year.

CFRA analyst Jim Corridore said the Basic Economy offering aims to compete with Spirit Airlines and other no-frills airlines.

Consumers that want to pick their seat in advance, bring a carry-on or sit with family members will need to pay more.  

"If you want to get from point A to point B with no frills, this is the place to do it, and if you want to know where your seat is, there is a different place to do it," Corridore said.

In introducing this option, United and American hope to close the gap in profit margins compared with Delta, which has benefited from being able to charge more to customers willing to pay for it.

"They're taking a seat that they've been pricing at the ultra-low-cost carriers' level and they're stripping stuff out of it in the hopes that people will not buy that seat and actually buy a more expensive seat that's normal economy," said Morningstar analyst Chris Higgins.

"It's a backdoor fare increase."

source: AFP