Get ready to pay more to fly

Rising fuel prices will lead to higher ticket prices. But experts say that won't be enough to save many smaller airlines.

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By Aaron Smith, CNNMoney.com staff writer

When I travel, I expect my flight will be…
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NEW YORK (CNNMoney.com) -- Passengers can expect to pay higher ticket fares this summer because of soaring fuel prices. But even that may not be able to save many small airlines from going under.

"Consumers need to realize that fares need to go up," said Jim Corridore, airline equity analyst for Standard & Poor's. "We're headed towards a year of marginal profitability for the industry at best and large losses at worst."

In fact, fares have already gone up this year, but the relatively modest increase in ticket prices pales in comparison to the fuel price spike.

Domestic fares edged up 6% in January and February, according to the Air Transport Association.

But the price of jet fuel rocketed up 55% during those two months, according to the Energy Information Administration.

"If fares were keeping pace with fuel, then airlines wouldn't be going out of business," said John Heimlich, chief economist for the Air Transport Association, an industry trade group. He said that 34% of a ticket's price goes towards covering the fuel cost, compared to 15% in 2000.

Continental (CAL, Fortune 500), Delta (DAL, Fortune 500) and United (UAUA, Fortune 500) recently raised ticket prices. US Airways (LCC, Fortune 500) said it has considered increases as well.

Northwest (NWA, Fortune 500) and Continental have also boosted fees for services such as extra baggage, phone reservations and food.

But these increases may not stick. And they certainly won't eclipse rising costs, says Philip Baggaley, the senior airlines credit analyst for S&P.

"We think the airlines will raise fares, but it's not going to be enough to offset the fuel costs in this soft economy," he said. "Jet fuel last year was a third of airline costs and will clearly be more this year. Therefore, revenues will have to rise by a third just to make up the expense."

But a fare increase of that magnitude is unlikely, analysts say, because passengers won't support it, especially in the face of a recession - even though the slowdown hasn't taken a bite out of ticket sales yet.

"We're in a consumer-led recession," said Heimlich. "That's the most difficult time to raise fares."

The airlines will have to take other measures, such as purging super-cheap fares, analysts say. Also, experts said they expect airlines to offer fewer flights and charge higher prices for them.

"Reducing capacity is the single most important thing they can do," said James Higgins, analyst for Soleil-Solebury Research. "That means less flights and fewer seats."

More bankruptcies ahead?

Some larger airlines may find some relief in consolidation. Northwest and Delta on Monday announced a plan to merge, which might help them reduce costs if the deal goes through. A Delta-Northwest deal could pave the way for other mergers, such as a rumored United-Continental combination.

But any deal is unlikely to get approved until late this year, if not next year. Plus, it will take some time after completion of a merger for an airline to start realizing savings from a combination.

And several smaller carriers, like ATA, Aloha Airlines and Skybus, have recently filed for bankruptcy as a result of rising fuel prices and said they will cease flying as a result. Frontier Airlines also just filed for bankruptcy but has received approval to continue operations while it reorganizes.

Experts had mixed opinions as to whether more airline bankruptcies and shutdowns will follow suit.

"The weak ones have already fallen," said Bob McAdoo, analyst for Avondale Partners, who is not predicting any more bankruptcies.

But Ray Neidl of Calyon Securities said some smaller airlines were still vulnerable to going under.

And given the rising fuel costs, Heimlich said there will "probably" be more bankruptcies, though he declined to point fingers at specific companies.

"There's only so much you can do," said Heimlich. "It's survival of the fittest." To top of page

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