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...

Industry price increases, when successful, have often been undone by sales that soon follow.

Prices could firm up if airlines put fewer seats in the air, said Vaughn Cordle, chief analyst with Airline Forecasts LLC and a pilot with a major airline. It's basic economics. Lower the supply, increase the price.

If domestic capacity falls by 10 percent to 15 percent, airlines might get some serious pricing leverage and offset more of the spike in fuel costs.

It won't be long, Cordle suspects, before the airlines with the worst balance sheets and greatest losses have to pull down domestic capacity to stem their losses.

To make a little bit of profit, the industry would have to see a 9 to 10 percent increase on fares overall, he estimates.

"The guys who are winning are the guys with the deep pockets, Southwest,'' he said.

Of course, Southwest has a great edge because, unlike most other airlines, it bought contracts that assure it now gets fuel well below market prices. It has hedges on 85 percent of its fuel needs this year at a mere $26 a barrel of oil. That's its price, even if oil, now trading at about $60 a barrel, tops $70.

Pincavage dismisses talk about too much domestic capacity. The problem is there is too much high-cost domestic capacity, in his view. Carriers need to lower their costs so they can make money in today's low-fare marketplace, he thinks.

That's the course that Northwest is trying to follow. It's pressing its unions to provide $1.1 billion in annual wage and other labor cost savings.

Northwest and other legacy carriers should be more concerned, though, about making money than holding market share, said Darryl Jenkins, a visiting professor at Embry-Riddle Aeronautical University and an industry consultant.

The old-line network airlines often overreact to low-fare challengers, cutting prices on more seats than necessary, matching low-fare seats by up to a 20-to-1 margin in some cases.

They also fail to capitalize on the power and value of their national and international networks to compete more effectively, said Jenkins.

"The whole thing about legacy carriers is that they fly everywhere,'' he said.

Legacy carriers have no one to blame but themselves for getting into this pricing mess, he said.

"This,'' said Jenkins, "is not what I would call a case study I'd want my students to read and follow."

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