2011 Airline Forecast: Airfares Will Climb as Profits Plunge

Airfares are expected to soar higher next year, even as the industry sees its profits decline.
Airfares are expected to soar higher next year, even as the industry sees its profits decline.

Airfares will likely continue to gain altitude in the New Year, even as the industry braces for a 40% decline in profits as fuel prices and a weak economy take their toll, industry experts said Tuesday.

International Air Transport Association officials expect airlines worldwide to post an aggregate net profit of $9.1 billion next year, down from $15.1 billion this year, Bloomberg reported. Revenue, meanwhile, is expected to inch ahead 5.8% to $598 billion.

Nonetheless, Wall Street analysts and the American Express Business Travel 2011 forecast predict air fares will rise -- not as a result of the lower profits, but because of simply supply and demand. Carriers will likely keep a tight reign on the number of seats they make available in the new year, and that can drive up the cost per ticket as demand rises, one Wall Street analyst, who spoke on condition of anonymity, told DailyFinance.

Passengers to Pay Like its 2007

The American Express report forecasts that airfares will reach pre-recession levels in 2011: It anticipates that prices for domestic economy-class and short-haul flights will rise between 2% to 9%, depending on the region, while international business-class and long-haul fares grow 3% to 10%, also depending on the region.

Airfares 2011
Airfares 2011

Higher airfares in 2011 would extend the industry's recovery for a second year. U.S. carriers' airfares have flown up 10% during the first 10 months of this year, while international carriers have seen a 17% increase, according to the Wall Street analyst. For carriers, that's far better than last year, when fares dropped 12% for domestic carriers and 16% for international.

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"The drop was due to the industry losing their highest paying passengers, the business class," the analyst explained, noting that the decrease has carried over from late 2008, when the economy and markets took a severe beating and corporate America began to cut back on air travel.

The industry responded by cutting capacity dramatically, but with demand also crashing, it was difficult to maintain fare prices, according to another analyst, Soleil's James Higgins.

Fuel Prices Drive Fares Higher

Operational costs are the main driver of fare hikes. When the cost of fuel, which accounts for roughly 28% to 29% of the total costs, goes up, the airlines pass that on to travelers via rate hikes, Higgins notes. Consumers and business travelers can watch oil prices to get a sense of where airfare prices are likely to go, Higgins says.

Consolidation in the airlines industry also has continued, with Continental (CAL) and United Airlines closing their merger and Southwest Airlines (LUV) and AirTran (AAI) working to wrap up their deal. But in 2011, Higgins doesn't anticipate seeing major merger mania in the industry. "I'm not betting on further consolidation," he says. "After this year, there's not much left but incremental mergers."

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