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Airlines hike fares - again

By Aaron Smith, staff writer

NEW YORK (CNNMoney) -- Airlines are hiking their fares at the fastest pace in two years, driven by high fuel prices and enticed by strong consumer appetite.

And travelers should brace themselves for more hikes, because there's no reason for airlines to stop now, according to industry experts.

"We are still on the back end of a recession and people are still watching their wallets," said Rick Seaney, chief executive of Farecompare.com. "[But] the environment for airlines is still pretty good. Supply is not rising dramatically and demand is picking up. I think airlines will continue to try hikes until people stop booking tickets."

Major U.S. airlines increased fares for domestic flights by $10 this weekend -- the fourth air fare hike so far this year, according to Seaney. This means that domestic air fares are about 12% higher, on average, than the same period last year, said Seaney.

In fact, the number of air fare increases this year has already outpaced 2010, which had a total of three hikes. Seaney said this year's pace is on par with 2007, when airlines posted a total of 17 hikes, and 2008, which had 14 increases.

Raising air fares is a delicate business, because the higher prices don't always stick with consumers. The way it works is that one airline will raise fares, and its competitors will watch closely to see if consumers continue to buy. If demand is undeterred, rival airlines will raise their fares, as well.

Last weekend, Southwest Airlines (LUV, Fortune 500) was the first out of the gate, and then the others followed.

"They have to walk a razor blade's edge," he said. "If they raise fares too high, people stop buying and then they have to ratchet it back."

Airlines need to charge more to cover rising fuel prices. And this problem is likely to persist, given the regime-threatening turmoil in the North Africa and the Middle East and the rising price of oil. The cost of jet fuel was also a factor in 2008, when prices hit record highs and airlines added "fuel surcharges" as a subliminal way of raising fares.

But now, consumers also face a plethora of ancillary fees for services that used to be included in the price of ticket, such as add-on fees for extra luggage, curb-side check-in, food, non-alcoholic drinks and reservation changes, to name a few.

The pace of air fare hikes so far this year, combined with higher fuel prices and a tentative recovery in consumer demand, suggests that travelers will continue to face higher prices, as airlines balance the value of their product against consumer confidence.

"The two go hand-in-hand: increased economic activity is driving demand which is pulling up fuel costs but enables airlines to raise ticket prices," said Raymond Neidl, independent airline consultant. "Unless instability in the Middle East curtails the economic recovery, we will see more ticket price increases going into the spring as demand gets even stronger." To top of page

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