November 12th, 2008

Airlines Take New Approach to International Routes

CHARLOTTE, N.C. -- Despite the sputtering economy, airlines still see bright spots in international travel, ranging from emerging markets such as Dubai and Liberia, to old favorites including Paris.

This month, for instance, UAL's United Airlines began Washington-Dubai service, while Delta launched Atlanta-Mumbai and announced plans to fly to Monrovia, Liberia, its seventh African destination, in 2009. On Wednesday, Delta will unveil additional international destinations for next year.

Already, US Airways and Delta have said that next summer, three medium-sized cities -- Charlotte, Pittsburgh and Raleigh-Durham -- will have seasonal service to Paris.

"We're pleased with the way [the Dubai route] started out and with what's developing in the Middle East," said Kevin Knight, United's senior vice president of planning, in an interview. "Everything is being impacted by the economy, but the Middle East has been strong. As I tell my employees, we talk about capacity reductions, but we're not solely focused on reducing capacity. There are opportunities. Dubai is one we identified, and we're taking advantage of others, as well."

United is also building its presence in Australia, adding a second nonstop from Los Angeles this summer, giving it nonstop flights to both Melbourne and Sydney. It will add a Dulles-Moscow flight in March, underscoring its confidence in the Dulles hub, which has flights to 21 international cities.

"Dulles flows north/south domestically, and it is a great [international] gateway," says Knight. "It's much more than government traffic. That whole Virginia area has grown exponentially, and we're the beneficiary."

Like other U.S. carriers, United has seen weakness in China. It eliminated the Los Angeles-Hong Kong route it started last year and scaled back frequencies between Dulles and Beijing, just as Delta is pulling back the Atlanta-Shanghai route. Meanwhile, US Airways, AMR's(AMR Quote - Cramer on AMR - Stock Picks) American and United are delaying China startups that had been scheduled for 2009.

The industry "is going through growing pains in Asia right now," Knight said. "But if you look at any outlook, over the long term Asia will continue to be a strong and growing market." United has dropped a San Francisco-Nagoya flight, as well as Los Angeles-Frankfurt, and has eliminated one of two daily San Francisco-Frankfurt flights.

Other carriers apparently have concluded that if any city can retain its appeal to summer leisure passengers, it's Paris. "You see some others pulling back internationally, but you don't see them reducing service to Paris," US Airways CEO Doug Parker said in a recent interview, as the carrier announced the resumption of Charlotte-Paris flights that were eliminated in the aftermath of the Sept. 11 attacks.

Charlotte/Douglas is far bigger today, following the 2005 merger between hub carrier US Airways and America West. In 2003, the airport handled 23.6 million passengers. The total for the first nine months of 2008 was 26.2 million.

Parker noted that US Airways trails the five other legacy carriers in international service. While others have 40% or more of their capacity in international routes, US Airways has just over half that.

"We still have catching up to do," he said. The carrier also plans new service next year from Philadelphia to Birmingham, England, Oslo and Tel Aviv.

Meanwhile, Delta announced summer service to Paris from both Raleigh-Durham and Pittsburgh. The concept seems like a risky one, because Delta lacks domestic feed traffic in both cities. But Delta spokeswoman Betsy Talton says both "are solid business travel markets, and these unique nonstop flights take customers to a strong hub in Paris," with connections to about 90 cities on Delta partner Air France.

Though it has eliminated an Atlanta-Vienna route and seasonally reduced trans-Atlantic service, Delta remains committed to international growth. In December, Delta will begin eight new flights to Latin America, the fastest growing international region. American is the leading carrier between the region and the U.S.

Even as carriers are planning new international flights, JP Morgan analyst Jamie Baker says US Airways and JetBlue(JBLU Quote - Cramer on JBLU - Stock Picks) "remain our favorite names, in large part due to their limited international exposure."

Baker wrote in a recent research report that the only question is "when, not if, the global economy [will] catch up to the U.S. airline industry." JP Morgan has financial relationships, in both investment banking and noninvestment banking, with JetBlue and US Airways.

In general, while domestic flying has been slashed by an unprecedented 10%, international flying by U.S. carriers remains relatively flat. International capacity rose 1.4% in October and 0.5% in November, and will decline by 1.7% in December, roughly in line with seasonal adjustments last year, according to a report by Barclays Capital analyst Gary Chase.

Jet fuel's down, but surcharges have stuck

Thai Airways' cheapest Los Angeles-Bangkok ticket last week had a $542 fuel surcharge round trip $352 more than the airline charged a year ago.
The least expensive ticket between Washington, D.C., and Tokyo on All Nippon Airways carried a $630 fuel surcharge, and that was $400 more than a year ago.

Between New York and Dublin, Delta Air Lines' (DAL) cheapest ticket last week came with a $230 surcharge, $138 more than on the same date last year.

Despite lower jet-fuel prices, fuel surcharges on international tickets are much higher than a year ago, according to an analysis of airline fare data for USA TODAY. Surcharges on many tickets have doubled, and many tickets on shorter flights which often burn less fuel have higher surcharges than longer-distance flights.

Most round-trip international tickets still have surcharges ranging from $200 to more than $500, even after airlines lowered the surcharges by $20 to $70 on many U.S.-Europe tickets last week. U.S. domestic fares still carry fuel surcharges, too, but international fares have the highest ones.

Meanwhile, the price of jet fuel in New York last Tuesday fell to $2.32 per gallon and averaged $2.35 on four previous weekdays, according to the most recent Department of Energy statistics. Those prices are lower than the price on Oct. 22, 2007, and about the same as the average price in September 2007.

"All the noise about airlines rolling back their fuel surcharges to pre-oil-crisis levels is a bunch of hooey," says Rick Seaney, CEO of FareCompare.com, which tracks airfares for consumers.

Airlines' views vs. travelers'

Airlines say the surcharges added during the past year did not cover their costs when fuel prices were much higher and that collectively, they still will lose billions of dollars this year. "The price of fuel has risen significantly for months and dropped only recently," says David Castelveter, vice president of the Air Transport Association of America, an airline trade group. "We are far from being out of the woods."

However, the fuel fees, combined with new service fees and increases in airfares, infuriate many travelers.

The surcharges are "a simple money grab by the airlines," says frequent flier Ron Goltsch, an electrical engineer in Parsippany, N.J. "They think we have become so used to seeing surcharges that they think they can add them on with impunity."

For large companies, fuel surcharges may add $10 million to $20 million a year in travel expenses, says Kevin Maguire, president of the National Business Travel Association.

The issue has even attracted attention in Congress. Last week, Sen. Bob Menendez, D-N.J., wrote a letter to 11 U.S. airline CEOs, calling on them to reduce fuel surcharges as soon as possible, because the price of jet fuel had dropped from $4.34 per gallon on July 2 to $2.34 per gallon on Oct. 15.

FareCompare.com analyzed 75 non-stop overseas routes to and from the USA, and compared fuel surcharges for the cheapest coach tickets on Oct. 22, 2008, with the same airline's surcharge on the same date last year.

The comparison shows that:

-Every airline and every route in FareCompare.com's survey showed a higher surcharge than a year ago. The average increase was 67%. Nearly one-quarter of the surcharges last week were more than 90% higher.

-Surcharges for Thai Airways' Los Angeles-Bangkok route and All Nippon Airways' Washington-Tokyo route had the biggest increases, rising 185% and 174% since last October.

-Surcharges for one or more routes of four U.S. airlines American, (AMR) Delta, Continental (CAL) and US Airways (LCC) at least doubled since last fall.

How charges can add up

Fuel surcharges can make up a large percentage of an international ticket's cost. For example, All Nippon's cheapest Washington-Tokyo ticket on Oct. 22 was $1,417, which included $710 in airfare, $630 in fuel surcharge and $77 in taxes and fees.

All Nippon's fuel surcharge is based on the average jet-fuel price in Singapore during a three-month period. The Japanese airline's fuel surcharge for the first three months next year will be based on average prices in Singapore from August through October this year, spokesman Damion Martin says.

Singapore Airlines has a fuel surcharge of $360 round trip for non-stop U.S.-Singapore flights, $440 for one-stop flights and $660 for itineraries with a flight beyond Singapore. Fuel surcharges don't cover the "dramatic increase in fuel prices," says airline spokesman James Boyd.

Northwest Airlines' (NWA) increased costs related to fuel prices "continue to exceed the surcharge levels in place," according to spokeswoman Michelle Aguayo Shannon.

"Many of our fuel surcharges were not in place when oil was at its record high of more than $147 per barrel," she says. "We're still trying to make up for those costs."

American, the largest U.S. carrier, has fuel surcharges on five routes that are 90% or more higher than they were a year ago, FareCompare.com's analysis shows. For example, the fuel surcharge on American's cheapest Chicago-Dublin ticket increased 172%, from $92 to $250.

American changes its surcharges to match competitors, but the airline will not "get into a market-by-market discussion of fuel surcharges," spokesman Tim Smith says.

Jet-fuel prices have not come down as dramatically as oil prices, and fuel costs "continue to bounce around, both up and down, on a daily basis," he says.

Delta Air Lines, which has increased its fuel surcharges 161% between Los Angeles and London, and 150% between New York and Dublin, has a similar view.

"While fuel has come down from the all-time high in July, it continues to be high and volatile," spokeswoman Betsy Talton says. "Delta continuously monitors multiple market factors and remains competitive in the marketplace."

In many cases, fuel surcharges "don't have anything to do with the price of oil nor the distance of the trip," Seaney says. "It's about competition and the price of a ticket."

Of the routes analyzed by FareCompare.com, the longest was 16,536 miles round trip between Chicago and Auckland, New Zealand. Air New Zealand's coach fare on that route had a $220 fuel surcharge — just $10 more than a year ago.

The shortest route in the sample was 6,528 miles round trip between Philadelphia and Dublin. US Airways' coach fare on that route had a $230 fuel surcharge — $70 more than a year ago.

Seaney believes declining oil prices are causing a public relations dilemma for airlines.

"Airlines were able to justify raising ticket prices by pinning it on oil prices, but now they have a public relations headache," he says. "Jet-fuel prices are dropping, and they're keeping the surcharges to try to recoup massive financial losses."

Frequent flier Rip Russell, an accountant in the motion picture industry who lives in Manhattan Beach, Calif., says he thinks fuel surcharges are a "tactic that the airlines have been using to hide the true cost of a ticket."

Some industry consultants and airline-securities analysts side with the airlines.

Aviation consultant Michael Boyd says consumers are not getting cheated by fuel surcharges. With airlines facing billions in losses, "Consumers should feel lucky there's anybody who wants to run an airline."

Ray Neidl, an industry analyst for Calyon Securities, also sees the need for fuel surcharges. Airlines are "still under-pricing their product," and costs "are still exceeding revenues," he says.

Barbara Beyer, president of Avmark, an aviation consulting firm, cautions that the oil market is unstable, and airlines might not want to react too quickly to lower prices.

"Airlines are probably thinking it is better to leave an accepted charge in place as unpopular as it may be than yo-yo back and forth with the charges and annoy their customers all over again."

Good news for fliers?

Airfare expert Tom Parsons sees some hope for fliers.

For the first time this year, U.S. and foreign airlines during the past two weeks have cut fuel surcharges on many routes, he says. The rollbacks are on flights to and from Europe and South America.

Airlines "are finally making adjustments to fuel surcharges on European routes due to the lack of demand for travel to Europe," says Parsons, who runs Bestfares.com, an online ticket wholesaler that identifies fare bargains for consumers.

Parsons expects fuel surcharges to drop further because of a weakening euro. European consumers will pressure European airlines to reduce fuel surcharges, and U.S. carriers will match their foreign competitors, he says.

Airlines prepare cutbacks on routes, flight frequency

ATLANTA The grip U.S. airlines have on travelers' wallets is about to get tighter as carriers go ahead with plans to trim their domestic schedules because of the high cost of fuel.

Executives acknowledge that despite the economic downturn, fares will rise, discounts currently available will be scarce, and routes and frequencies of flights will be reduced as domestic capacity is cut through the end of the year. The changes starting in September come on top of a litany of new charges for luggage, drinks, pillows and other amenities   ¢  ‚¬  € announced by some airlines earlier this year.

"Airline travel is airline travel it's been bad for a long time," Maureen Stea, an American Airlines frequent flier, said recently at Dallas-Fort Worth International Airport. "I suspect prices will go up, fewer people will travel, and if you're willing to pay the price it will be fine."

There were sharp capacity cuts during prior weak economic periods in the early 1990s and between 2001 and 2003, but fares went down as discount carriers moved in and filled the void, offering more competition, analysts said. But the high price of oil, airlines' limited ability to further cut certain costs and the fact that many of the discount carriers are facing the same difficulties as the big carriers make things different this time, analysts said.

"Despite this sluggish U.S. economy, the general demand picture is better than it was post-9/11," said Standard & Poor's analyst Craig Collins. "In addition, you have this consistent response across the board of airlines raising fares and adding fees."

On average, domestic fares between large metro cities are already up roughly 16 percent since Jan. 2, while fares between small cities are up roughly 37 percent year-to-date, according to Ted Brooks, head of airfare research site www.HighFares.com.

The cheapest roundtrip ticket with a 10-day advance purchase, for example, on an American Airlines flight from Chicago to New York cost $258 on Aug. 26, excluding government and airport fees. That was an 87 percent increase from the $138 it cost on Jan. 2 for a similar advance purchase, according to Anita Olander. The cheapest roundtrip ticket with a 21-day advance purchase on a United Airlines flight from Denver to Washington cost $382 on Aug. 26, excluding government and airport fees. That was a 37 percent increase from the $278 it cost on Jan. 2, Collins said.

big cuts ahead

Recently announced airfare sales for travel during the traditionally slow fall season will be harder to come by as more capacity comes out of the system in the last four months of the year.

"If somebody sees a good fare, they should grab it," said Richard Hild, senior checker of marketing and planning for AirTran Airways.

Booking early for travel during peak times like the holiday season generally can get you a cheaper ticket than waiting until the last minute. But, airlines usually do not offer fare sales for travel over the holidays.

American Airlines, United Airlines, Delta Air Lines, Northwest Airlines, Continental Airlines, US Airways, JetBlue Airways, AirTran and Alaska Airlines plan to cut domestic capacity during the third and fourth quarters by single- to double-digit margins.

JetBlue, for instance, in September will end service between several cities, including Boston to San Francisco and Washington to Las Vegas. Southwest Airlines Co., which had resisted the kinds of capacity cuts being made by other carriers, will end service in November between Kansas City and Sacramento, Calif., and between Oakland, Calif., and Tucson, Ariz. Some airlines, including JetBlue and Southwest, are adding or expanding service to states where other carriers are reducing service, like Florida. However, Southwest said recently that it will eliminate nearly 200 flights early next year as it struggles with high fuel costs and a weakening economy.

Fewer overall seats in the air means planes that remain will be fuller, which gives airlines pricing power to raise fares.

"The reality is and I don't want to diminish this the industry is going to have to cover its costs," Eric Reader said.

Travelers are bracing for the impact of higher fares.

On a recent day at DFW Airport, passenger Anita Olander, a classic rock DJ in Wichita Falls, Texas, said she might not be visiting her parents in Los Angeles quite so often this fall.

"If I can find a $200 ticket, I'll go," she said. "If there are fewer flights, that won't bother me, but if flights are really expensive, I just won't go or I'll go by myself instead of bringing my son and husband."

At Phoenix Sky Harbor International Airport, passenger Alberta Bradley, a retired municipal worker, said she can afford the fare increases. What bugs her, though, are all the new fees.

"I'd just rather they incorporate that in the fare," Bradley said of baggage fees some airlines are charging. "And then you're good to go. You don't have to worry about that."

Charges for soda

Several airlines are now charging fees for a first checked bag. Some have imposed a fuel surcharge on frequent flier reward tickets. US Airways is even charging for soda.

Cuts in the number of flights in the U.S. also could mean people who booked flights far in advance for travel after September might have to fly at a different time or, if a route has been eliminated by their carrier, they might have to find another airline to get them to their destination. But airlines don't expect that to be a big issue.

"A very, very small number of people would have purchased tickets for travel in September or thereafter before the flights were taken out of the fall schedule in May and June of this year," American spokesman Cary Casas said.

As for frequent fliers, capacity cuts could mean fewer award seats available at the lowest level of award travel. Casas said that in American's case, people could pony up more of their frequent flier miles to guarantee they get a reward ticket for any available seat on a flight. Atlanta-based Delta recently announced a similar guarantee.

While the price of a barrel of oil has fallen from a high of $147.27 in July to about $117 recently, that is not likely to slow the upward spike in fares, according to fare researcher Collins. The current price of oil is still more than five times what it was in mid-August 1992, and it is more than four times what it was in mid-August 2002.

"I think if oil prices continue to go down, you will hear calls for relaxation of fuel surcharges, but that doesn't mean they won't hike base airfares," Jim Carter said.

He said that if load factors reach 90 percent, "There will be no reason to discount