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...

Overall, fares are running at late 1980s levels, reports the Air Transport Association. A fourth of all domestic passengers now pay $200 or less, including taxes, for a round-trip ticket; two-thirds pay $300 or less.

To be sure, fares on routes with little or no competition can still be pricey, if not outrageous, in the view of many travelers.

"I had intended to fly to Calgary,'' said Sharron Thomson of West St. Paul. "But it was close to $1,000."

Fares are typically soft, however, where old-line carriers such as Northwest go head-to-head with low-fare carriers such as Southwest, ATA, AirTran and Jet Blue.

The bankruptcies of United and US Airways have also played into the downward spiral of fares. Air carriers involved in reorganizations usually discount fares substantially to maintain cash flows and enhance continued customer loyalty, Northwest has said in SEC filings.

In the Twin Cities, low-fare competition certainly is not what travelers will find in markets such as Chicago. Other than Northwest, no carrier has more than three gates at the Minneapolis-St. Paul International Airport.

Still, Northwest faces low-fare competitors on 69 of 141 domestic routes on which it provides nonstop service. (Low-fare carriers offer a mix of nonstop and one-stop service on the 69 routes.)

Overall, 87 percent of Northwest's Twin Cities customers could fly a low-fare carrier to their destinations, Northwest says.

With the Internet, consumers can hunt down the lowest fares with just a few mouse clicks. That, of course, puts more pressure on carriers to compete on price.

"By and large, people view air travel as a commodity,'' said Tom Bach, Northwest's vice president of network planning and revenue management. "They say, 'I will get to Florida safely and with my bags with just about anybody. Who's the cheapest?' ''

In most cases, Northwest has matched or reduced fares on routes where it has low-fare competition. Northwest's domestic yield in the first quarter of this year fell by about 8 percent, compared with the same quarter in 2004. Meanwhile, its fuel costs rose 40 percent in the quarter and they're still rising.

On some routes, such as Twin Cities to Dallas, fares have truly plummeted in response to Delta's Simplifares initiative, which capped most walk-up fares at $499 one-way in January.

In response to Delta's move, Northwest dropped its one-way walk-up fare from the Twin Cities to Dallas from $752 to $499.

Competition from Mendota Heights-based Sun Country subsequently caused Northwest to introduce a walk-up fare of $213. With a three-day advance purchase, that fare is now $98 one-way, including some but not all taxes and fees.

In its first-quarter earnings conference call, Northwest indicated that Delta's fare actions would cost Northwest a "couple hundred million dollars" in annual revenue.

Why did Delta do that?

The airline faces much more pressure from low-fare carriers, according to industry wonks. AirTran's hub is in Atlanta. And Florida, which provides much of Delta's revenue, is a hotbed of low-fare competition.

Scott Rohlf knows he's getting a pretty good deal when he flies from Orlando to the Twin Cities to visit family.

He paid about $300 for a round-trip flight this month, about $50 more than he did a year ago. But he still finds fares are lower than they were five to 10 years ago.

"They're higher than they were a year ago because of oil,'' he said. "But they're quite a bargain, even with the fare increase."

And sales make them even more of a bargain. Last month, you could buy a Twin Cities-Orlando round-trip ticket seven days in advance for $199 on ATA and $232 to $243 on AirTran, Northwest or Sun Country. Those prices include $24 to $47 in taxes and airport and security fees.

"The average fare has to increase or we'll lose some airlines,'' said Minneapolis-based travel expert Terry Trippler. "You do not sell your product for less than it costs you to make it. But the airlines don't seem to catch on to that. They all must have missed the same day of school."

Northwest and other carriers have tried and failed seven times this year to increase the $499 one-way walk-up fares implemented by Delta and reluctantly adopted by rivals in January.

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