Gale Warning

Mar 04 2011 Gale Warning BY admin TAGS Fares

 

We’ve hiked the gale warning flag.

Telltale signs have been with us for the past few months, but in the past few days it’s become obvious: the airline industry is getting ready to batten down the hatches and do everything it can to weather rising energy prices. For airline customers it means fewer available seats and much higher fares.

The obvious culprit for rising energy prices is the civil unrest in the Middle East, but there’s more to it. Look at what’s been happening to the spot price of a gallon of jet fuel since last September:

 

  • Aug 30: $2.059
  • Sept 13 : $2.129
  • Oct 4: $2.226
  • Nov 8: $2.372
  • Dec 6: $2.439
  • Jan 18: $2.663
  • Feb 22: $2.880
  • Feb 28: $2.998
  • March 2: $3.147

Want to know why fares are going up? You’re looking at it.

In the past week and half we’ve heard rumblings that the airlines will make big third quarter cuts in capacity (meaning number of seats in the air). Fewer seats means higher fares.

Earlier this week Bloomberg news reported on American and Delta.:

“American originally said it would boost…capacity 4.3 percent” in 2011.” “In light of the current environment, in particular recent fuel price trends, we are trimming back our capacity plan for 2011,” said Andy Backover, an American spokesman. Delta on Feb. 3 lowered its plans for capacity growth this quarter to no more than 5 percent, down from earlier plans to expand by as much as 7 percent. The airline said at that time it was “revising full-year plans to reflect new fuel levels,” without giving specifics.

Meanwhile, “The International Air Transport Association has cut its forecasts for 2011 global airline profits because of the recent surge in crude oil prices.”

In a sure sign that interesting times are ahead, Allegiant said this in a letter to the Department of Transportation (DOT):

"Allegiant is considering a new pricing option for use on its website: when making a purchase, consumers would be able to choose between a traditional "locked in" fare that would not fluctuate, and a lower fare that could change before the date of travel. That lower fare could be reduced further or could increase (up to a set maximum that would be clearly disclosed) depending on changes in fuel price between the booking and travel dates. This would be a non-compulsory alternative for consumers; it would provide them another option for potential substantial savings on their trip costs and would be clearly disclosed and explained prior to any purchase."

Is this going to happen — will you be able to purchase a floating fare? Last year the DOT wrote consumer protection rules that are still just proposals. These proposed rules would forbid floating fares. Allegiant is trying to make a case for them now before the proposals become law:

"The potential to offer this alternative is especially important for Allegiant. First, even a slight change in fuel cost has a major financial impact on Allegiant, as it does on other air carriers (as the Department is aware). Second, Allegiant caters specifically to leisure travelers. This means, among other things, that a high proportion of Allegiant customers purchase their travel significantly in advance of their travel dates—in many cases months in advance—making it especially difficult for Allegiant to predict what the fuel price might be at time of travel. Preserving the ability for carriers to offer and consumers to choose between a locked-in price and a price that may change, within limits, based on the price of fuel, strikes an appropriate balance between the interests of consumers and the interests of carriers."

Will the DOT listen and grant Allegiant's wish? I'd guess not. Current DOT leadership hasn't shown much interest in airline financial problems.

 

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