Recs

5

How to Deal With Sky-High Airfares

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The economic recovery has made many people breathe a big sigh of relief. But an improving economy has brought what some would call an unintended consequence: higher airfares.

Mile-high prices
Less than two months into 2011, airlines have already raised fares four times. That beats out the total of three fare hikes for the entire year in 2010 and sets a pace that could put 2011 in the same league as 2007 and 2008, when fares rose 17 times and 14 times respectively.

Southwest Airlines (NYSE: LUV  ) started the most recent fare increase, which saw prices rise $10 for domestic flights. After the increase, fares were roughly 12% higher than they were this time last year. Delta Air Lines (NYSE: DAL  ) was responsible for a more targeted boost earlier in the month, in which it raised fares for high-priced business travel by as much as $120 per round trip.

Dealing with fees
In addition to higher fares, airlines have made the most of add-on fees to boost their revenue. Earlier this month, AMR's (NYSE: AMR  ) American Airlines brought back the dreaded fuel surcharge, pinning a $5 fee each way for domestic trips. United Continental (NYSE: UAL  ) followed suit with $3 charges, and JetBlue (Nasdaq: JBLU  ) has added fees of $35 to $45 for its flights to the Caribbean, including Puerto Rico.

Even the new federal budget includes bad news for flyers. The proposed budget would allow airports to charge as much as $7 per flight segment, up from $4.50 now, to improve runways and pay for other capital projects. In addition, proposals to boost the 9/11 security fee from $2.50 per segment to $5.50 in 2014 would continue the practice of nickel-and-diming airline passengers for income. Yet rather than helping airlines, those moves would likely drain potential revenue as customers would eventually reach the point at which they won't accept higher total costs to fly.

Profits, for a change
At least for now, though, demand seems to be steady, and airfare increases are sticking. That's good news for an industry that has seen one of the biggest turnarounds in the past several years.

During the recession, airlines had to deal not only with falling demand but also the record-high oil prices that resulted from the boom in commodities. In response, airlines took a number of steps, including flying their planes much closer to full capacity to avoid losing money on empty seats and discontinuing free services like meals and baggage.

Those moves didn't just save the airlines from ruin during the recession. When the recovery came, airlines didn't give up on the moves, and as a result, profits soared last year. Over just the first nine months of 2010, airlines enjoyed higher profits than they earned in any full year in more than a decade.

Consolidation has also played an important role in building synergies and reducing duplicative costs. With United and Continental's recent merger, Delta's purchase of Northwest in 2008, and Southwest's proposed purchase of AirTran (NYSE: AAI  ) , some are looking for the carriers that have thus far not made strategic combinations, including AMR and US Airways (NYSE: LCC  ) , to look for potential deals.

What you can do
All of these moves have been immensely profitable for investors in many airlines, with United Continental shares having tripled in the past two years, and Delta and Southwest nearly doubling. But from a flyer's standpoint, there's only so much you can do to control your costs.

One thing to do is to look in many places for the best fares. Going onto online portals like Expedia and Orbitz to check fares and look for discounts always makes sense, although you should also look directly at airline sites as well, because sometimes you can get even better deals there than you'll find on the portals.

Another smart move is to look on different days for travel. If your plans are flexible, then sometimes switching your trip by a day or two can mean paying hundreds less for your flight.

Unfortunately, a strengthening economy will mean greater demand for travel, which puts airlines in a commanding position to squeeze more money out of their passengers. And as long as global tensions don't crimp travelers' willingness to pay up, times couldn't be better for the airlines.

Trying to save on expenses is just as important as investing well. Take a look at 13 Steps to Investing Foolishly and find out everything you need to know to make your financial life better.

Fool contributor Dan Caplinger can't stop talking about his amazing holiday travel experience, where he made two tight connections and actually had an airline hold a plane for his family. Despite his gratitude, he doesn't own shares of the companies mentioned in this article. Southwest Airlines is a Motley Fool Stock Advisor recommendation. 

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy flies higher than a kite.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 25, 2011, at 6:00 PM, xetn wrote:

    As for me, I will not be flying much. My reasons are the higher fares and more importantly, the groping hands of the TSA (transportation sexual assaulter).

    As a matter of fact, the TSA seems to be expanding their role:

    http://uk.gizmodo.com/5768805/tsa-harasses-9+yo-boy-and-othe...

  • Report this Comment On February 26, 2011, at 12:55 PM, EBKie wrote:

    As for me, i have seen a near 100% increase (92% to be specific) in the flight i frequently take from Columbus, OH to BWI. It's outrageous!

  • Report this Comment On February 26, 2011, at 4:59 PM, bretco wrote:

    Flights to the British Virgin islands have more than doubled their prices over the last 6 months.

    It is an outrage to pay $1,400.-1,800.00 and get stuck in a middle seat.

    this is one area that was much better when it was regulated....probably the only one besides the hedge fund guys.

  • Report this Comment On March 01, 2011, at 1:40 AM, fay51 wrote:

    Expedia and Orbitz do not include some airlines that don't pay them fees, so I start my research with kayak.com and go from there.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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