Rising oil prices hit holiday fliers

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NEW YORK (CNNMoney.com) -- Holiday travelers are as likely to have record high oil prices bite them at 30,000 feet as they are at the gas pump.

Gasoline prices have lagged far behind the run-up in oil prices since Labor Day, but jet fuel prices have soared by about a quarter during that time.

And with strong demand for travel - the Air Transport Association estimates that 4 percent more American will be flying over the Thanksgiving travel period than did a year ago - airlines are passing on some of the higher costs to passengers in the form of higher fares and fuel surcharges.

Last week United Airlines (Charts, Fortune 500) raised fares $10 on most round-trip tickets, hikes that were matched by most of its old-line airline rivals known as network carriers, such as American Airlines (Charts, Fortune 500), Delta Air Lines (Charts, Fortune 500) and Continental (Charts, Fortune 500). Those increases followed a series of $20 fare hikes started by American announced Nov. 2, along with scattered increases in October.

Even bigger fare increases and fuel surcharges are being put into place on many international routes. Tom Parsons, president of Bestfares.com, said he's seen some international routes where the fuel surcharge has more than doubled the published fare. The weak U.S. dollar is adding to higher fares on overseas routes by increasing travel to the U.S. The weak dollar also gives U.S. carriers greater pricing power when competing against overseas rivals.

Airline consultant Michael Boyd estimates that fares are up 5 to 6 percent just since Labor Day due to the fare hikes, and says the worst is yet to come.

"Average fares will probably go up much more between now and the end of the year than they have up to now," he said.

By comparison, the average price of a gallon of unleaded gasoline is up about 8 percent since Labor Day.

Still, airline ticket prices are not keeping up with the increase in fuel prices. The average jet fuel price is up 24 percent since the day after Labor Day to a record of $2.736 a gallon, according to petroleum price tracker OPIS.

"It's not nearly keeping up," said airline analyst Ray Neidl of Calyon Securities, who estimates fuel now makes up between 30 to 35 percent of an airline's cost base.

But it isn't clear how long prices will remain this high, even if oil prices don't retreat.

"Demand has remained strong, so the increases are justified," Neidl said. "But the airline executives are concerned because right after the holidays, you're going into the soft season."

Industry experts say much of the increase is coming from the major airlines offering fewer discounted seats on an airplane, rather than simply implementing across-the-board rate hikes that might not be matched by the lower fare carriers.

But those low cost carriers, such as Southwest Airlines (Charts, Fortune 500) and JetBlue Airways (Charts), haven't been as quick to follow the fare hikes being announced by the network carriers, but there have been some increases there as well, said Boyd.

Chris McGinnis, editor of Expedia Travel Trend Watch, a quarterly report on travel trends, said it will be interesting to see what happens with the post-holiday fares. But he expects the fare hikes will do little to dampen travel between now and the end of the year.

"Travel seems to have been very resilient. It was a record-setting summer and it seems like it will be a record-setting holiday travel period," he said. "Going home for the holidays is a little more inelastic than a spring break trip or heading somewhere on a long weekend."

Many economists are on the lookout for a significant slowdown in the economy later this year or early in 2008, which in turn could cut into demand for air travel and fares. There have been concerns that consumers have been cutting back some big-ticket purchases due to problems in housing and mortgage markets.

John Heimlich, chief economist for industry trade group ATA, says that airlines are on guard for such a slowdown.

"We need to watch advance bookings," he said. "So far, I haven't seen any evidence of a downturn, but most macro economists say one is coming, just a matter of how big and when. It hasn't materialized in our passenger demand yet."