INSIGHT: Higher US airline costs could be passed on to consumers

29 May 2012 16:54  [Source: ICIS news]

Southwest Ailrines jetsHOUSTON (ICIS)--Despite reporting better profits in the first quarter of 2012, a group of major US airlines still have losses that stem from both global and domestic factors, which could continue to dampen profits through the rest of the year.

“We are in a fragile environment with high oil prices and a softened global economy,” said Brian Pearce, chief economist with the International Air Transport Association (IATA).                                                                                               

Pearce explained that the airline industry as a whole is not performing so badly, but its performance would not be considered positive if it were another industry sector, such as oil and gas                                                                                   

One main factor pulling US airline profits down this year is persistently high jet fuel costs, and at least one airline believes the rising prices may continue through the second quarter.

US-based Southwest Airlines has said it expects second quarter fuel costs to stay near the levels seen in the first quarter – in the $3.40-$3.45/gal (€2.72-2.76) range. The airline reported a loss of $18m for the first quarter of 2012.

If fuel prices do stay high in 2012, US airlines are likely to pass on some of the elevated costs to consumers through higher ticket prices, especially during the busier summer travel season.

Three out of the six US airfare hike attempts in 2012 have been successful, according to The latest attempt, proposed by Delta on 17 April, did not pass.

The last price hike was proposed by Southwest and Jet Blue on 26 March. The result was a price increase of $6-10  for round trip domestic flights.

Airlines do have some resistance to increasing ticket prices because it is harder to fill seats. Typically, when a low-cost carrier, such as Southwest, gets on board or initiates the increase, the price hike is successful.

But consumers may get some relief from rising prices, even if it is not immediate.

Usually, when airline ticket prices hit consumers’ threshold, those travellers will stop flying, causing airlines to have more empty seats and halting further price hikes. Prices also naturally drop off in August, at the end of the summer travel season.

Aside from the higher jet fuel prices, other major threats to the US airline industry in 2012 remain, including the global fiscal crisis, geopolitical conflict, unpredictable natural disasters and increased taxes.

US taxes for airlines are rising. The most recently approved proposal is a security tax, which will double from $2.50 to $5.00. According to trade association Airlines for America (A4A), this will cost airline passengers more than $700m annually.

“Our customers today pay 20% – $60 on an average $300 domestic roundtrip ticket – of their ticket prices in taxes, on a par with taxes for alcohol and tobacco, products taxed to discourage their use,” said A4A President and CEO Nicholas Calio in the association’spress statement regarding the tax. “It’s a simple equation: When you add taxes, demand for air travel is dampened, resulting in lost jobs and lost air service.”

Another major concern that is fairly new to the airline industry is the impact of the European Union’s Emissions Trading Scheme (ETS), which puts a cap on the amount of certain greenhouse gases that can be emitted by all airlines flying into and taking off from the bloc of countries.

The added cost of purchasing these credits has caused friction with several countries, including the US.

“We are uncertain what will happen over the next year [with the ETS],” said Pearce. “Today, allowances are cheap, but it won’t stay that way. This addition to fuel costs will rise substantially.”

($1 = €0.80)

By: Anna Matherne

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