Why Airlines Are Ready to Fly High

As summer draws near, more and more people are beginning to plan their vacations. What they're finding, though, is that the price of airfare -- whether from Southwest (NYS: LUV) , Delta (NYS: DAL) , United Continental (NYS: UAL) , or American -- has increased, and not just to take advantage of the industry's favorite upcoming quarter.

It's not difficult to figure out what's driving airfare higher and higher: the rising cost of jet fuel. Though fuel costs have come down some in the past month or two, jet fuel prices are still at historically very high levels. Airlines have spent the last decade trying to absorb the increasing expense and not pass too much of it on to customers, but their profit margins have been shrinking, and they can no longer keep up.

From 2000 to 2011, for example, the cost of jet fuel increased 268%, while the cost of an average plane ticket only increased 10%. And by the end of 2011, fuel was the airline industry's largest expense, accounting for 35% of total costs. It makes sense, then, that Southwest's operating margins have decreased from 18.1% to 4.4% in that time. A tough economy forcing consumers to tighten the purse strings hasn't helped, either. But the industry's well-timed decision to raise prices as many Americans regain at least some of their discretionary income might be a relief to the companies' hurting investors, dealing with losses as low as 25.23% over the last two years alone:

DAL Chart
DAL Chart

DAL data by YCharts

Most airlines were able to grow revenues in 2011, but many also saw bottom-line decreases from 2010 mostly due to higher operating costs led by fuel. Finally being able to pass on the price hikes to consumers could help them avoid a similar fate for 2012.

According to the Department of Commerce's Office of Travel and Tourism Industries, passenger fares in 2011 increased nearly 19% in 2011. And according to a report by the World Travel and Tourism Council, tourism in 2012 is expected to grow by 2.8%. That may not sound like much initially, but keep in mind that that's slightly higher than the expected global rate of economic growth of 2.5%.

The majority of this growth is expected to be led by international travel, which is why airlines with international exposure are poised to regain some long-lost pricing power. The recent trend of consolidation among airlines should also help with the problem of intense competition driving prices lower and lower.

And more good news comes from Expedia, which recently reported that travelers aren't shunning airlines even though airfare has increased. With the increase in prices, the online travel agency has also seen an increase in the number of tickets purchased this year over 2011. These favorable trends for the airline industry are shaping up to be much more lasting than just a summer fling.

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At the time thisarticle was published Fool contributor Amanda Buchanan holds no position in any company mentioned. Click here to see her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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