Friday, February 11, 2011

Higher fares and the return of the fuel surcharge

Airlines posted strong profits in 2010, bouncing off lows from the Great Recession and aided by extremely low fuel prices that came as a result of that same economic downturn. 

2010 was a great time for airline passengers, too: desperate to attract passengers, airlines ran plenty of fare sales and promotional offers, and while baggage and onboard meal fees did raise the potential bottom-line price of travel for some, unavoidable fees like the dreaded fuel surcharges of 2008 were removed.

This year is fast shaping up to be different.

Fuel prices have surged.  Part of the equation is genuine demand, as emerging economies like India and China have been consuming more oil even as the developed nations of Europe and North America have pulled back.  Speculation also plays a big role; oil is frequently used to place bets of instability in the Middle East, where protests are seen as potentially impacting oil shipping as well as production.

As a result, we're now seeing a return of the fuel surcharge to some U.S. airlines, including American, United, and Continental1.  For now, it's ranging from $3 to $5 each way, which isn't so bad.  But it may go much higher: at the height of the oil spike in 2008, fuel surcharges exceeded $60.

To be sure, fuel isn't the only thing driving increased travel costs.  Despite one year of profitability, airlines are still coming off nearly a decade of losses.  The capacity cuts made over the last few years, coupled with increased demand for flying, has left airlines with considerably more pricing power.  That means that fares are going up, too. 

Add to this that some airlines are cutting back on specials--for instance, United has stopped advertising discounted weekend travel routes, though Continental continues to offer these---and 2011 promises to be a more expensive year to fly.

1 United and Continental are both owned by United Continental Holdings, but presently continue to operate as separate carriers.

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