Cheap airlines face fare hike choices

Airlines hike fees and fares again

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Issue #1: America's Money - Everyday on CNN

NEW YORK (CNNMoney.com) -- As the price of jet fuel approaches $4 a gallon, even traditionally low-cost carriers are being forced to raise fares.

Southwest Airlines had "hoped to get through 2008 without significant fare increases," CEO Gary Kelly said Wednesday.

But he acknowledged that the airline known for its low fares will need to follow the rest of the industry to keep up with the price of oil.

Kelly made the comments at the Merrill Lynch Global Transportation Conference in New York, which was monitored via Web cast.

Southwest (LUV, Fortune 500), a large carrier known for keeping costs and fares low, would be looking to push fares up "gently," but avoid extra fees, Kelly said.

The company has been running a campaign emphasizing its avoidance of fuel surcharges and fees for services like baggage checks and snacks.

As the price of oil approaches $140 a barrel, many airlines are struggling to offset fuel expenses with cost-cutting moves. Several carriers have raised fuel surcharges, cut back on flights and started charging fees for services, such as checked luggage, which had previously been included in the fare price.

Over the past two weeks, extra surcharges for checked bags on American Airlines and United Airlines flights began to kick in. American is operated by AMR Corp (AMR, Fortune 500)., while United is run by UAL Corp (UAUA, Fortune 500).

The worldwide price of jet fuel hit $3.971 a gallon last week, according to the International Air Transport Association.

And industry players expect it to keep heading higher. "We're preparing for $4 jet fuel," said Kelly.

Southwest is "aggressively experimenting" in several markets to see what fare hikes and cost cuts work. "If you move the fares too far, then people shop harder," he said.

JetBlue Airways (JBLU), like other low-cost carriers, depends on price savvy customers and has been trying to find ways to ease into fare hikes as well.

"Everything is on the table," JetBlue CEO David Barger said at the conference.

But cost-cutting measures can cut in to service quality, according to a recent J.D. Power and Associates study.

JetBlue leads North American carriers in customer satisfaction, but scores at JetBlue, and across most North American budget and main stream carriers, fell in 2008.

"We're moving more toward the non-discretionary traveler," said Barger, who added that it looks like there's plenty of room for further fare increases, since customers appear to have tolerated the hikes so far.