Airlines Fare Badly on Price War

by: Zacks Investment Research

Top players in the U.S. airlines industry reported a steep decline of approximately 50% in their domestic fares following a $20 price jump that was announced in February 2011.

Larger carriers faced competitive pressure that led them to reduce their increase to as low as $10.00. The discounted carriers limited their price hikes to approximately 50% of the large carriers, which forced the latter to trim their increases to the same levels so as to avert any pricing disparities.

Giant carriers such as American Airlines, subsidiary of AMR Corporation (AMR), Delta Air Lines Inc. (NYSE:DAL) and US Airways Group Inc. (LCC) initiated a $20 roundtrip fare hike. United Airlines, a subsidiary of United Continental Holdings (NYSE:UAL) followed suit, with a sky-high $60 hike in business class.

This marked the fifth broad-based price increase in the U.S. airline industry since January 2011 when it began with $4 to $10 hikes. Several low cost domestic airlines such as Southwest Airlines Co. (NYSE:LUV), JetBlue Airways Corporation (NASDAQ:JBLU), AirTran, a subsidiary of AirTran Holdings Inc. (AAI) and Frontier Airlines, subsidiary of Republic Airways Holdings Inc. (RJET) raised their prices to match this initial rise.

Since the beginning of 2011, airline companies have raised their airfares approximately 12–14 times to compensate for escalating fuel costs. Industry giants surpassed pricing levels by a large margin as against low cost carriers to offset rapidly rising fuel prices.

The currently plunging airfares and rising fuel price will affect the profitability of these airlines. American Airlines reported a pull-back in its capacity growth plans for 2011.

The company has curtailed its estimated capacity growth to 2.5% from 3.5% as announced in January 2011. Companies such as US Airways and United Airlines are also expected to follow this trend of offsetting steeper fuel costs with fewer flights and higher fares.

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