Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



What Fare Hikes Mean for These Airlines

Intense competition in the airline industry led to instability, as the airlines fought market share battles with fare decreases. As major carriers consolidate, however, price wars are becoming less frequent, and are even allowing some carriers to raise prices. But for a price increase to succeed, other carriers have to follow. This time around, it appears that they have.

As in most industries, when one carrier raises prices, its customers tend to jump ship to another. This is especially true if the product is highly commoditized, as in the case of air travel. Since there are laws against outright price fixing, airlines must rely on other carriers seeing the benefits of a fare increase, instead of maintaining lower fares to mop up market share.

According to USA TODAY, there have been 10 attempts to raise fares so far this year, with only two being successful; both were performed by Delta Air Lines. Delta recently rolled back one fare increase after United Continental was the only other carrier to match it. 2013 has been a fairly unsuccessful year for fare increases compared to 2011 and 2012, where nearly half of the attempts were successful.

Transborder flights
With Canada being the largest trading partner with the U.S., it is no surprise that flights across the U.S./Canadian border matter to major airlines. Although these flights do see significant demand, airlines nonetheless strive to make money on them in the face of competition. United Continental Holdings (NYSE: UAL  ) and Star Alliance partner Air Canada (TSX: AC.B  )  took a major step toward this goal by raising fares on transborder flights by approximately $10.

With such a poor record in 2013 for fare increases, the odds would tend to favor the latest United Continental/Air Canada fare increase getting rolled back. But this fare increase is "gaining some traction" according to USA TODAY, which reports that WestJet (TSX: WJA  ) , US Airways (UNKNOWN: LCC.DL  ) , and American Airlines (a subsidiary of parent company AMR (UNKNOWN: AAMRQ.DL  ) ) have at least partially matched the increase. Having all major competitors on board is critical to a successful fare increase. I'll break down why each one matters in the following sections.

This airline has been a thorn in Air Canada's side since its founding, and has grown to become a major Canadian competitor for flights within North America. Operating as a discount carrier, WestJet typically gains market share by using its superior cost structure to undercut Air Canada's fares.

By raising its fares alongside Air Canada, WestJet is showing here that it will not undercut prices on every route, and that it will still seek to maximize revenues when situations permit. I would view this as a positive for Air Canada, since it gives the carrier more latitude to raise fares. 

I also can see benefits for WestJet. By getting in on this model, WestJet remains competitive with other carriers, but sets itself up to continue generating strong earnings as its workforce ages and its cost advantage decreases.

American Airlines/US Airways
By now, day-to-day aviation industry followers know that these two airlines are in a legal battle to join together and form the world's largest airline. Outside of the courtroom, negotiations are probably going to happen sooner or later between the airlines and the Department of Justice, which will hopefully allow the merger to move forward.

Since the DOJ's arguing that a lack of competition in the industry will lead to higher future prices, American and US Airways are naturally hesitant to raise fares for fear of reinforcing the DOJ's argument. This may partly explain why previous fare increases failed, since these two major carriers have been unwilling to follow along. However, American and US Airways matched this latest fare increase on transborder routes, making it more likely to stick than previous attempts.

It's questionable how the DOJ will react to this fare increase with regard to merger negotiations. I can only speculate that the carriers must have examined the situation very carefully before following the fare increase, and concluded that it would not have a major impact.

Higher fares
IThe latest fare matching on transborder routes shows that fares increases are still able to gain traction among multiple major carriers.

For this particular increase, Air Canada and WestJet are the biggest beneficiaries, since they have a greater reliance on these routes than the four U.S. legacy carriers. However, I see this as a bullish development for the industry as a whole, and maintain a positive outlook on airline shares in general.

2 companies turning a profit without hiking fares

Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!

Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2637090, ~/Articles/ArticleHandler.aspx, 9/30/2016 4:17:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,308.22 164.77 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
AAMRQ.DL $0.00 Down +0.00 +0.00%
AC.B $0.00 Down +0.00 +0.00%
AIR CANADA, CL.B CAPS Rating: No stars
LCC.DL $0.00 Down +0.00 +0.00%
US Airways Group CAPS Rating: *
UAL $52.47 Up +1.33 +2.60%
United Continental… CAPS Rating: **
WJA $22.92 Down -0.31 -1.33%