MSNBC wrote an article yesterday about US Airways’ new bottled water fee, the latest from the ‘Big Six’ carrier. The article also suggests that US Airways, along with other carriers, should add to the fares and not add more fees. MSNBC also points out that low-cost carrier Southwest Airlines has raised fares without adding any fees. Other airlines, if not all, have raised their fares as well. However, a clear argument can be made against this article and its views. Legacy carriers cannot just hike up fares to break-even.
Why can’t legacy carriers hike up fares to break even and not add fees? Competition. Since the arrival of low-cost airlines, such as Southwest and JetBlue, legacy carriers have been forced to downsize the price of their tickets in order to compete with these new carriers. Their inability to recognize these new airlines, in their respective early phases, allowed LUV and JBLU to enter the market and expand. Since then, the prices of tickets have dropped significantly. In the late 90′s, legacy carriers such as US Airways started low-cost, no frill, subsidiaries like ‘MetroJet’ (a US Airways’ spinoff), in order to compete with low cost carriers. Although the attempt for legacy carriers like US Airways and Continental (with Continental Lite) failed, it was their first try at attempting to compete with low-cost carriers. After that, legacy carriers started to decrease their fares system-wide (especially to compete with Southwest & the Southwest Effect). In this time period, mid 90′s to mid 2000′s, airlines could make money this way and still keep their fares above Southwest (since legacy carriers offer frills in-flight). Now, with the price of oil, legacy carriers are adding fees and increasing their fares. However, the fare increases on routes that low-cost carriers serve, cannot be too high, otherwise low-cost carriers will eat up the travelers (which is happening).
Southwest Airlines has fuel hedged. Most of their hedges will expire in 2012. Since they are paying a cheaper rate for fuel than larger airlines, they have been able to continue expansion and raise fares slowly, without adding fees. Legacy carriers pay a higher rate for fuel and typically do not have the fuel-efficient aircraft resources that Southwest has. Therefore, they add fees to continue to compete with low-cost carriers, but still break even (if that).
As the price of fuel increases, we can expect to see all carriers add to the price of tickets. Remember, high load factors are nice, but low-cost carriers know that they can make more money if they raise ticket prices just enough to be under legacy carriers’ fares. We should also expect to see other carriers adding more fees, or increasing the rates of the fees already in place.
Image: flickr.com
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