More hikes in air fares

United led the new round of increases Thursday night, boosting roundtrip ticket prices $10 to $60, depending on distance and competition (travelers will pay more on routes not served by Southwest). American and Delta followed up on Friday. The fare hikes come after American's new $15 fee for checking a single piece of luggage (other carriers are following suit). Crazy-high fuel costs are behind the new fees and higher fares. "Airlines have no choice but to pass on the cost of fuel to consumers," Rick Seaney, CEO of FareCompare.com, told AP. The bigger question is how much longer the cash-strapped carriers can keep going without more mergers (speculation has centered on American). The NYT's Joe Nocera contrasts this week's annual meetings at Southwest and American. As you might expect, the American gathering was relentlessly downbeat, with word of the baggage fee, reduced flight schedules and layoffs. As for Southwest, it was quite different.

Southwest, of course, is the great success story of the airline business — the only company that has been consistently profitable through these tumultuous times, even as many competitors have filed for bankruptcy or gone out of business. In 2007, it earned $645 million. It maintains a healthy balance sheet and has plenty of cash. Its annual meetings tend to be love fests. This year, though, was the love fest to end all love fests. The company’s beloved co-founder, Herbert D. Kelleher — known to one and all as Herb — was stepping down as chairman of the board after 37 years. So many shareholders showed up that the company had to set up an overflow room to accommodate the crowd.

[CUT]

Several analysts I spoke to marveled at Southwest’s remarkable fuel hedges, which have saved it hundreds of millions of dollars in fuel costs — and have probably been the single most important reason why the company has remained profitable. For most airlines, fuel now constitutes 40 percent of their costs, up from 10 percent just a few years ago. But not Southwest. Mr. Kelleher told me that right now, 70 percent of the company’s fuel is hedged at $51 a barrel — “which ain’t bad when oil is $126.” I also wound up thinking that Mr. Kelleher had the good fortune to build his airline during the great bull market of the 1980s and 1990s. Though the company was tiny during its first decade, it grew rapidly during the 1980s, and its stock became a powerhouse.

What's curious about the Nocera piece is the short shrift he gives to the airline being fined $10.2 million for inspection failures and the apparent conflict of interest involving former Southwest employees who went to work for the FAA. For an airline that could do no wrong, this was an astounding breach of trust.


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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
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