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As fuel prices rise, airlines warn of higher fares

New York

THE price of jet fuel has gone up 50 per cent in the past year, and airline executives are warning that they may have to raise ticket prices and cut capacity if fuel costs continue to rise.

Delta Air Lines on Wednesday became the latest carrier to cut its profit forecast because of the sharp rise in fuel prices. American Airlines had taken that step a little more than a month ago, when it estimated that the higher prices would cost it US$2 billion this year.

With the summer travel season about to begin and many of their seats already booked, the airlines have indicated that they are not going to act immediately. In fact, Delta told investors on Wednesday that it planned to make decisions in the next month on capacity in the fall, when demand usually drops off.

A growing economy and an increasing reliance on fees, for everything from baggage to premium economy seats, have spurred several years of strong profits for airlines, and they still expect to be profitable this year. But "probably not at the levels we were anticipating in December", said Alexandre de Juniac, the head of the International Air Transport Association.

And with newer, more efficient planes, fuel now accounts for 17 to 22 per cent of airlines' operating costs, down significantly from the last time fuel costs spiked, an industry consultant, Robert Mann, said. Brent crude, the global bench mark, closed at more than US$75 a barrel Wednesday, up about US$20 over the past year.

In two weeks, the Organization of the Petroleum Exporting Countries (Opec) is set to discuss whether to relax the oil production limits that have helped raise prices. When oil prices hit record highs a decade ago, airlines added fuel surcharges to tickets. When oil prices dropped a few years later, those extra charges were slow to disappear, as the carriers chose to use the revenue to reinvest in their business, pay dividends to shareholders or raise employee pay.

More recently, the positive economic environment led airlines to add flights in response to strong ticket sales, said Patrick DeHaan, the head of petroleum analysis at GasBuddy, Web- and app-based fuel-tracking platform.

"Some of the big legacy carriers have been vocal about their plans to add capacity this year," he said. "So what you're seeing is some pretty healthy demand for jet fuel as the economy continues to grow." Mr DeHaan said he did not expect any immediate action by the airlines.

"There's a lot of pressure on fares right now, and it's going to be a challenge raising fares, especially in the summer," he said. If current jet fuel prices emerge as a new norm, he added, "I would look for more increase in the fall".

And eventually, the high price of fuel could put newly added routes on the chopping block, said Patrick Surry, chief data scientist at the travel app Hopper. "If it continues to rise, we'll start to see a knock-on effect on pricing and consolidation, maybe some shrinkage of capacity and routes," he predicted.

George Hobica, founder of Airfarewatchdog, said investors' concerns would add a sense of urgency to how and when airlines responded. "Wall Street is just going to slam them if they don't increase prices or reduce capacity," he said.

This might not mean higher base fares, thanks to greater competition from low-fare carriers, Mr Hobica said, but travellers might see fuel surcharges become common again or have to pay higher fees for checked bags, Wi-Fi and other ancillary services.

In particular, industry experts predicted that travellers flying internationally, booking business-class and premium-economy seats, and flying less competitive routes - especially to or from smaller airports - could expect to pay more in the fall. NYT

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