Low-Fare Airlines Hitting Some Rough Air

With crushing fuel prices and the pressures of rapid growth and increasing competition, many analysts and industry insiders are wondering whether the low-fare engine has run out of steam.


For five years, low-fare airlines have pummeled their larger competitors, forced down ticket prices and substantially reshaped the travel industry.

But today, with crushing fuel prices and the pressures of rapid growth and increasing competition, many analysts and industry insiders are wondering whether the low-fare engine has run out of steam.

Consider:

Dallas-based Southwest Airlines, the nation's largest discount carrier, implemented its largest price increase ever this week, ending a $299 cap on one-way fares, in response to rising fuel costs.

JetBlue Airways, once the darling of Wall Street, posted a loss for the fourth quarter, and its stock (ticker: JBLU) has fallen 33 percent this year.

AirTran Airways also reported a small loss for the fourth quarter and has been cutting some unprofitable routes, including its Dallas/Fort Worth-Los Angeles flight.

Frontier Airlines is in the middle of a bruising battle between Southwest and United Airlines in Denver. That carrier's stock ( FRNT) is down 23 percent this year.

"The industry's biggest problems right now are at the low-fare carriers," said Mike Boyd, an airline consultant with the Boyd Group in Evergreen, Colo. "They're the ones who are vulnerable."

To be sure, the discount airlines continue to outperform the major hub airlines such as American Airlines of Fort Worth, which lost $861 million last year. Other carriers did even worse: Delta Air Lines lost $3.8 billion last year, including restructuring costs, and Northwest Airlines lost $2.6 billion.

But the traditional airlines are focused on restructuring, in some cases through bankruptcy. They've been cutting costs, jettisoning pensions, canceling airplane orders and working to boost revenue.

Wall Street has been bullish on some of the larger airlines. American, for example, has seen its stock ( AMR) rise nearly 21 percent this year. Shares of Houston-based Continental Airlines ( CAL) are up 22 percent for the year. United Airlines' shares ( UAUA) have risen 13 percent since it left bankruptcy in February.

The discount airlines, meanwhile, are struggling to stay on top. After several years of robust growth and strong financial performances, the low-fare airlines face their own cost pressures and operational problems.

"We're going through a rough patch right now," said David Neeleman, JetBlue's chief executive, at an aviation conference in New York this week.

Fares rising

Southwest and other discounters have had a strong effect on fares over the past five years. Since 2000, average domestic fares have dropped nearly 17 percent, from about $259 each way in 2000 to $216 in 2005, according to American Express Business Travel.

They hit a six-year low in mid-2005, according to the group. But prices edged up during the second half of the year, rising to $223 during the fourth quarter, according to the firm.

"As demand grows and capacity shrinks, the airlines have grown stricter on sticker prices," said Andy McGraw, senior vice president and general manager of American Express Business Travel North America.

That trend appears to have accelerated in 2006, led by Southwest. The carrier has twice raised fares since the year began. Each time, competitors quickly followed suit.

"For the last five years or so, we've all gotten used to what's basically been like a permanent fare sale," said Alan Sbarra, an analyst with Roach and Sbarra Airline Consulting. "But now we're clearly in a rising fare environment."

Neeleman has hinted that JetBlue will also raise prices. He told analysts in New York that he was looking for "a better mix of fares," which typically means higher prices in some markets.

He said the airline planned to slow its growth in cross-country and New York-to-Florida routes to cool off the competition.

"With less insane competition, we can get a better mix of fares and higher average fares," he said.

Although it's bad news for consumers, the rising ticket prices could help major carriers like American recover.

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