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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.
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.
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