Airfares Hover Below True Cost Of Flying

American Airlines planes on tarmac i i

American Airlines planes sit on the tarmac at the Miami International Airport on July 16 in Miami. The airline is facing record losses due to the escalating cost of fuel. Joe Raedle/Getty Images hide caption

itoggle caption Joe Raedle/Getty Images
American Airlines planes on tarmac

American Airlines planes sit on the tarmac at the Miami International Airport on July 16 in Miami. The airline is facing record losses due to the escalating cost of fuel.

Joe Raedle/Getty Images

2008 is already shaping up to be the worst year in the history of the American airline industry: Losses are projected to be as much as $13 billion. Nine smaller carriers have declared bankruptcy, and the sky-high cost of fuel is threatening the viability of almost all major U.S. carriers.

Despite mounting losses, airlines have so far tried to keep airfares from ballooning out of reach for customers. Instead, they have added ancillary charges for services such as checked bags and snacks, and begun using smaller aircraft to offset rising costs. Even so, airlines are often losing money, not making it, on the passengers they transport.

"I don't think we've ever seen the kind of stress put on the industry — and I'm including the time after 9-11," says Dan Garton, executive vice president in charge of marketing for American Airlines.

In order to compete with discount carriers, airlines like American have kept airfares as much as 25 percent below their true market value. If a passenger is currently paying $375 for a round trip ticket, for example, the airline needs that price to increase to $470 round trip for it to break even — that price being the discounted fare. And that helps explain why, despite flights that are often packed, American is losing $300 million each quarter.

Much of those losses are due to skyrocketing fuel costs. "One day this last June, the price of oil shot up $11 a barrel in about an hour and a half. For us that's $80 million," Garton says.

The vast majority of American Airlines' competitors are in the same position. Only Southwest is earning a profit because of its advantageous fuel hedges. The other airlines — United, Delta, Continental and U.S. Airways — all need to raise fares, or they will go bankrupt. While federal law prohibits the CEOs of airlines from colluding to set prices, the logic and the math are inescapable — airfares have to go up.

Garton says the reason airlines have not yet raised airfares is because they are worried that all their full airplanes wouldn't be as full anymore.

A decade of inexpensive oil and the Internet have created this trap for the airlines.

Dave Castelveter, of the Air Transport Association, says consumers share in the responsibility for the airline crisis. He says airlines have to keep airfares below their market price in order to remain competitive online. When consumers visit a travel Web site like Expedia or Travelocity, they often view flights by clicking on a button that says "list flights by lowest fare."

While airline executives would like to make a profit, they're busy trying to stay on the first page of those search results — and they can't do that if they hike their fares. This is part of the reason they've begun adding "hidden" costs for checked luggage and aisle seats, for example. Those ancillary fees do not affect a flight's price position on Travelocity and Expedia.

Still, the math is inescapable: Garton says airlines are going to have to begin increasing fares and slowly bring customers around to this unhappy reality. Over the next several months, carriers are going to cut capacity first, then raise fares.

Your Flight Plan: How To Find Cheaper Airfares

Air travel isn't getting any easier. Fare and fee increases, overbookings and long delays are taking a toll on the traveling public. Sticker shock has many consumers planning ahead — researching and purchasing tickets further in advance to find the best discounts.

Increases in fares to popular destinations can mean that travelers pay almost two times what they paid a year ago. For example, the cost of a round-trip ticket from Chicago to New York on United on Aug. 1 was $258, according to FareCompare.com. A year ago the cost was $138.

But one sign of relief occurred this week: Airlines began their fall sales, which typically last just a few days for booking travel through mid-November.

Here, a look at what travel experts say consumers can expect to find in the terminals and on the runways this fall, along with tips for finding the best fares online.

What To Expect

Fare Increases

"The average fare has been up this summer as much as 15 percent year over year," says Amy Ziff, the editor at large for Travelocity.com. Ziff says airfare hikes for the autumn may be less dramatic: The average fare for the fall is up about 8 percent compared with where it was last year, she says — a $342 average domestic airfare for September through Nov. 15, compared with $300 for the same period last year.

Fewer Flights

Marisa Thompson, an equity analyst for Morningstar, says airlines are reducing capacity — which means that in the fall and winter, consumers will start to see reduced flight availability and therefore fewer travel options. Smaller regional markets will be hardest hit, she says.

A Delta spokeswoman said the airline's domestic capacity in the third quarter will be reduced by 11-13 percent, compared with the same period last year. By contrast, she says Delta's international capacity will increase by 16-18 percent.

Getting Bumped

According to the Department of Transportation, 15,049 passengers were involuntarily bumped from flights for the second quarter of 2008 (April through June); that's down from the 18,389 bumped during the same period last year. An involuntary bump occurs when a passenger does not accept an airline's compensation. If a passenger accepts any compensation — whether it's a round-trip ticket or some amount of money — then it becomes voluntary.

"The reason that airlines overbook flights is that people don't show up," says David Castelveter, a spokesman for the Air Transport Association. He says airlines engage in this practice because the "product is perishable."

Even so, this summer the load factor — or the number of people airlines book on a flight — was "outrageous," says Tom Parsons, editor of BestFares.com. He expects this to taper off in the fall.

Meanwhile, passenger rights advocate Kate Hanni, founder of the Coalition for an Airline Passengers' Bill of Rights, says a trend has emerged whereby passengers are getting bumped without any compensation. She says airlines are overselling seats and lengthening the amount of time that passengers need to be at the airport prior to a flight: "If you're one minute late, you're not only denied access to the plane but also denied boarding compensation."

To top it off, Hanni says, her coalition has received many complaints from passengers whose bags were sent ahead of them. She says these incidents started happening in May, when many airlines started charging fees for checked baggage and the Department of Transportation issued a new rule that doubled bumping compensation for travelers.

Tips For Finding Better Fares

With fuel costs soaring, airlines will have to raise fares to keep pace, says industry spokesman Castelveter. But you can take steps to help minimize the impact on your pocketbook:

Sign Up For Fare Alerts

These services help you keep on top of fare changes before you buy.Travelocity.com allows you to pick up to 10 destinations to track. Members can be notified when airfares go up or down by $25, or they can customize the dollar amount.

Explore Bundles

Sometimes it's possible to get a lower airfare by purchasing it in conjunction with hotels and a rental car. That's because travel Web sites can get negotiated wholesale prices for airfare, hotels and rental cars. Parsons of BestFares.com advises consumers to do the math — sometimes it might be worth it to bundle, even if you don't use the hotel or rental car.

Research The Best Time To Fly

Expedia.com's trend tracker displays the least expensive time to travel to a given destination and tracks average airfares for a given route over the past three years. Expedia also offers a calendar service that displays the lowest fares available in a monthly calendar format.

Compare Flights To Nearby Airports

BestFares.com lets you compare flights to alternative airports near your destination. Taking public transportation, such as a bus or train, from that airport, or renting a car and driving, could save you money.

Book Early

Travelocity.com's Ziff says people are booking flights on average four days earlier for the fall season than they did last year. She suggests people book earlier than 21 days in advance to find the best prices.

Be Flexible With Travel Dates

Most travel Web sites allow you to check pricing on alternative dates once you've plugged in your itinerary. If you're flexible with your dates of departure and return, you might find a better deal.

Buy When Tickets Go On Sale

Despite the reduction in flights expected this fall, Parsons thinks there is "plenty of wiggle room for the airlines to cut fares compared to what we've seen in the summer." But he cautions consumers to hold off purchasing until the right time: "You should not be buying unless you know there's a sale."

To understand whether there's a real sale going on, he suggests you price the dates that you want to fly, then look up the price for the same itinerary for a date that is five months later. (The time frame for airline sales is typically three to four months.)

Parsons says some airlines typically begin their sales late on Tuesdays, but savvy shoppers allow other airlines to react. So that may mean waiting until Wednesday or Thursday to make a purchase.

Comparison Shop

Passenger rights advocate Hanni recommends that people consult more than one Web site before purchasing fares online.

Don't Forget Your Frequent-Flier Miles

Check to make sure your miles won't expire anytime soon. Many people rack up additional miles by taking flights with more connections, says Hanni.

Understand The Fees

Kayak.com has an airline fees table that shows additional costs travelers may face, including checked-baggage fees.

Take Steps To Avoid Getting Bumped

When you purchase a ticket, make sure it comes with a seat assignment. Always print boarding passes all the way through — including all connecting flights. If you don't have a seat assignment printed on your ticket, you are "the most likely candidate to be bumped, to not get on that flight — but your baggage will," Hanni says.

Make sure you arrive at the airport early. Add at least a half-hour of buffer time.

If you don't have a seat assignment, be wary of curbside check-in because your bags may depart without you.

As an additional protection, pay with a credit card. Hanni says credit card companies will "fight for you if you're bumped and you don't get your bumping compensation."

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