Fares Bleed Legacy Airlines

Legacy carriers face quite a conundrum. They haven't been making money with the fares they've been charging. But if they raise fares, they fear gains from fare increases may be exceeded by revenue losses from customers who choose to book lower-priced...

The nation's airlines have posted operating losses north of $22 billion since the start of 2001. And the flood of red ink at the heart of the brewing showdown between Northwest Airlines and its mechanics union shows no sign of stopping soon.

Most airlines saw their per-gallon fuel costs jump by more than a third in the first quarter of this year. And fuel costs have continued to rise as oil prices hover near $60 a barrel.

So, what has happened to fares? Well, they've plunged, on average.

At Tennant Co., a Golden Valley floor maintenance equipment manufacturer, employees are flying for about 20 percent less than they did in the fourth quarter of 2004.

"We are seeing record low fares," said corporate travel manager Marty Wahoske. "It's a very illogical, commodity-type business."

The lack of pricing power by airlines is a huge factor in their continuing losses, which are inflaming battles with unions over billions of dollars in wage and other givebacks and threatening to send more airlines into bankruptcy. And there's the risk that more carriers racking up huge losses will follow the lead of United and US Airways and dump their hugely underfunded pension plans, perhaps requiring a taxpayer bailout of the agency that insures the plans.

Low-fare airlines are setting pricing for their "legacy" rivals, such as Eagan-based Northwest.

"Southwest and other low-fare carriers are the price setters,'' Northwest CEO Doug Steenland said during an appearance at the University of Minnesota's Carlson School of Management last week. "If we raise fares and they don't match us, we have no choice but to roll them back."

Some travelers will pay a premium for nonstop service, assigned seats, flight frequencies and other benefits. But many won't. To save even just $10, some consumers will opt for a one-stop flight on a low-fare airline.

"A good number of customers have told us loud and clear that what they value more and more is price," said Steenland.

Legacy carriers face quite a conundrum, says John Pincavage of the airline consulting firm Pincavage & Associates in Westport, Conn. They haven't been making money with the fares they've been charging. But if they raise fares, they fear gains from fare increases may be exceeded by revenue losses from customers who choose to book lower-priced tickets on other carriers.

"It's a war of attrition,'' said Pincavage. "The guys who need the price increases the most have the biggest costs. Meanwhile, the low-fare carriers don't want to or don't have to raise fares."

Legacy carriers are constrained by higher labor costs, restrictive work rules, huge pension-plan obligations and other trappings of the days of heavier government regulation. Upstart low-fare carriers are not.

The downward spiral of fares is often masked by the taxes and fees that can now account for a quarter or more of the price of a ticket. But airlines' domestic yields what they get per mile for flying passengers averaged 12.06 cents last year, down from 14.57 cents in 2000, the last good year for most airlines. On an inflation-adjusted basis, the carriers' average domestic yield in 2004 was the lowest on record, the Air Transport Association estimates.

Yields for Northwest, United and other "network" carriers fell about 6 percent in the first quarter of this year, compared with the same quarter in 2004, according to the Bureau of Transportation Statistics.

Based on what corporate travel managers are saying, fares in the second quarter were running as much as 10 percent lower than they were in the second quarter of 2004, said David Beckerman, director of consulting services for Back Aviation.

At best, recent fare increases that have "stuck" have offset only half of a $16-a-barrel spike in crude oil prices. That's what Mark Streeter, managing director of J.P. Morgan Securities, told Congress last month.

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