Southwest Air Hikes Raise the Industry

by InvestorPlace Staff | March 27, 2012 9:36 am

Following on the heels of airfare price hikes by JetBlue Airways (NASDAQ:JBLU[1]) and Virgin America over the past weekend, Southwest Airlines (NYSE:LUV[2]) — a pioneer in low-cost, no frills air travel — raised round-trip fares by $4 to $10 in an effort to combat rising fuel prices.

It is anticipated that higher jet fuel costs will result in higher airfares across the board at all major carriers, and indeed, legacy carriers Delta (NYSE:DAL[3]), American (PINK:AAMRQ[4]), Frontier (NASDAQ:RJET[5]), US Airways (NYSE:LCC[6]) and United (NYSE:UAL[7]) all raised fares within hours of Southwest’s action.

The fare hike is the second successful effort by the airline industry to raise industry fares in five separate attempts. Last year the industry tried raising fares 22 times, with nine of those increases holding.

As quoted in USA TODAY[8], William Swelbar, a research engineer at MIT’s International Center for Air Transportation, said “the cost of jet fuel will be the catalyst for increases throughout the year. As fuel goes higher, so will the cost to consumers.”

However, another school of thought in the market suggests that nothing more than simple supply and demand is driving the industry increases, as mergers between airlines mean fewer airline choices, fewer flights, and lower capacity in general for increasing passenger demand.

George Hobica, founder of Airfarewatchdog.com[9], which tracks fares, believes that “increased demand and lower capacity are driving fare hikes as much as higher fuel costs.”

Regardless of pricing, Southwest continues a commitment to their business model, relying on low fares, no baggage charges and no change fees to passengers.

In those areas, it is unlikely the other airlines will follow suit anytime soon.

– Marc Bastow, InvestorPlace Assistant Editor

Endnotes:
  1. JBLU: http://studio-5.financialcontent.com/investplace/quote?Symbol=JBLU
  2. LUV: http://studio-5.financialcontent.com/investplace/quote?Symbol=LUV
  3. DAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DAL
  4. AAMRQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAMRQ
  5. RJET: http://studio-5.financialcontent.com/investplace/quote?Symbol=RJET
  6. LCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=LCC
  7. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UA
  8. As quoted in USA TODAY: http://travel.usatoday.com/flights/story/2012-03-26/Southwest-joins-JetBlue-in-raising-fares-blames-fuel-costs/53789492/1
  9. Airfarewatchdog.com: http://www.airfarewatchdog.com/

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