Surge in fuel prices set to drive up airfares

Key Points
  • American Airlines trimmed its full-year forecast because of higher fuel prices.
  • Airlines can add fuel surcharges to tickets.
  • American's CEO expects fares to rise as oil prices climb.
An American Airlines plane takes off at the Miami International Airport.
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Airlines are paying more for fuel, and passengers may soon pay more to fly.

A spike in fuel prices, generally airlines' biggest cost after employee pay, is eating away at carriers' profits.

"When (the fuel price) increases, the cost of air travel increases," American Airlines' CEO Doug Parker said on a call with analysts Thursday. "So I do believe that consumers will pay more."

Parker said he does not expect those higher fares to hurt demand significantly, however.

Low-cost Spirit Airlines said it raised fares last week by $3.

American Airlines on Thursday trimmed its forecast for full-year earnings due to costlier fuel. The world's largest airline now expects to earn $5 to $6 per share this year, down from the $5.50 to $6.50 it said it expected in January.

The airline said its fuel was about 25 percent more expensive compared with last year, an increase that it said added $412 million to its costs. Competitors Delta Air Lines and United Airlines have also said that they are paying significantly more for fuel this year than last.

American's shares were down more than 6 percent in midday trade. Other airline stocks were also lower, with Spirit down 5 percent, Delta shedding 2 percent and United falling 3 percent.

Airlines have struggled to ramp up airfares in recent years, amid growing competition and rock bottom fares on some routes.

Still, American expects revenue per available seat mile — the amount the airline generates for each seat it flies a mile — to rise 1.5 to 3.5 percent in the second quarter from a year earlier.

Fuel surcharges, which can be applied to some international tickets, could drive up the cost of a ticket, too. American declined to comment on whether it would add such fees. These are usually in a category known as "carrier imposed fees" that are sometimes added to fares, airline analysts said.

"These have typically been imposed on a rapid run-up in fuel prices, like fuel shortage situations," said Robert Mann, an aviation consultant and former airline executive. They are applied generally to long-haul international flights and are not subject to the same tax levels as general base fares, he said.

In January Delta's president, Glen Hauenstein said: "Clearly, internationally, we've seen fuel surcharge increases due to the higher level of fuel, and we expect that to continue if fuel stabilizes at sort of higher level."

Henry Harteveldt, founder of travel consulting firm Atmosphere Research Group, called such fees "the little black dress" of the airline industry.

Major airlines have recently introduced basic economy airfares, which in exchange for what are generally the lowest airfares, passengers eschew advance seat selection, the possibility of an upgrade and in some cases use of overhead bins or free checked bags.

American and Delta are in the process of rolling out these fares on flights to Europe, and executives have said they measure its success by the rate of passengers who pay higher fares to avoid it.

American's president, Robert Isom, told investors Thursday that now 60 percent of passengers opt for the higher fares. The airline has not ruled out expanding basic economy to other markets.