What's Up With Airlines And Airfares In 2011?

With airfares rising, airline fees proliferating and airline seats in short supply, travelers could be facing a tough year.

Air passengers are understandably concerned that recent and future airline mergers – Delta-Northwest, Continental-United and the proposed Southwest-AirTran deal – will result in even higher air fares.

But as long as there are at least two carriers in a market, there will be limits to how high airfares can go.

The real evil to watch is volatile oil prices, which are fluctuating in the $85-$92 per barrel range and could hit $100.

Most airlines have protected themselves to some extent by "hedging" – locking in current prices on the gamble that oil prices will rise – but if oil prices go completely through the roof, the airlines will face another financial crisis. And they will raise fares.

"If it's apparent, as it was in 2008 when oil reached $147 per barrel, that new price levels will persist for a substantial period of time, airlines will usually begin raising fares and implementing fuel surcharges," Business Travel Coalition chairman Kevin Mitchell tells AOL Travel News. "Airline industry consolidation through mergers in the past couple of years, as well as overall reduced seat capacity, all but assures near-immediate steps to increase fares to offset oil price increases."

Henry Harteveldt, principal analyst with Forrester Research, notes that consumers will be affected by higher oil prices in paying more to heat their homes and gas up their cars. And those price hikes on necessities are coming at a time when many have already trained themselves to do without luxuries and extras.

Travel may be one of the first things cash-strapped consumers cut. And this will impact fares, too.

"Airfares are not elastic. There are not many people who will fly at any cost. When airfares go up people tend to defer a vacation and stay at home. And then the airlines say 'uncle' and fares go down," says George Hobica, who follows the industry as president of airfarewatchdog.com.

The airlines have already raised fares in recent weeks. American started the latest round late last month, raising domestic flights by $20 roundtrip, just two weeks after it successfully initiated a $10 roundtrip hike.

Continental, Delta, United and US Airways all matched the latest increase.

Hobica predicts 2011 will see average fare increases in the range of 5% to 10%. "We're not talking 20%," he says.

Air passengers this year can still look forward to fare sales, but they will likely be confined to specific routes that aren't doing well, rather than across the board.

Fees paid by passengers for everything from checked baggage to prime seats are here to stay as a source of airline revenue –U.S. carriers took in $4.3 billion in fees in the first nine months of 2010.

Hobica predicts there will be new fees in 2011 and these might include a charge for lap babies on domestic flights as well as new checked baggage fees based on how far you travel.

"The same baggage fee for 100 miles or 1,000 miles, that doesn't make sense. Maybe –given the price of oil – they will have a bigger baggage fee for longer trips," Hobica says.

New fees are also likely to include charges for pre-ordered food on international flights. If the idea –already being tested by United on some international flights – catches on, economy class meals even on international flights may become a thing of the past.

Another big question this year is whether the airlines can maintain what's known as "capacity discipline."

A full flight does not mean a profitable flight – too many passengers traveling on discounted fares can mean the flight operates at a loss.

The airlines have cut capacity to ensure that seats are filled by travelers willing to pay fares that are high enough to make each fight profitable. But that also means some communities will lose air service altogether if they can't support profitable flights.

American, for example, has all but abandoned the St. Louis hub that it acquired when it bought TWA 10 years ago, and many observers wonder whether the "new United" will maintain all eight of its hubs.

Loss of service is not a likely scenario in the pending Southwest-AirTran merger, however.

Southwest is actively seeking new markets – it is in growth mode, not shrink mode – both large, in the form of Atlanta, and small, in the form of the smaller cities AirTran serves with its 717 aircraft.

The mergers will leave American, once the largest U.S. carrier, in the No. 4 spot, with few options remaining for a dance partner.

Several airline analysts suggest that it will seek a merger with US Airways, which was jilted by United last year.

There is some good news for travelers: Now that they have a bit of cash on hand, the airlines are beginning to invest in their products again.

That's due in part to the strengthening of their global alliances – Oneworld (led by American and British Airways), Skyteam (Delta, Air France/KLM) and Star Alliance (United, Lufthansa).

Those alliances have taught U.S. airlines that they are competing not just in the U.S. market but in the bigger world where airlines like Singapore and Emirates have taken customer service and comforts to higher levels.

So passengers can expect to see more seat-back monitors, electrical outlets, Internet access and other amenities, even if they have to pay fees for some of them in the economy cabin.

(Fran Golden contributed to this report.)

Photo: Southwest Airlines
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