Get Ready for Higher Fares and Fees to Jolt Sagging U.S. Airline Profits

(Bloomberg) -- U.S. airlines, bruised by higher fuel prices, are stepping up efforts to raise fares and increase fees to avoid a third straight year of declining profits.

“Carriers have struggled to keep pace with the rising cost of fuel, among many others,” John Heimlich, chief economist of Airlines for America, a trade group, told reporters on a conference call Wednesday. “I can assure you carriers are looking at every aspect of their revenue arsenals and cost elements to try to right the ship.”

Such initiatives are increasingly apparent as the summer travel season winds down. Southwest Airlines Co. is charging more for early boarding on some flights. JetBlue Airways Corp. became the first major U.S. carrier to raise fees on the first checked bag to $30. Business fares climbed 8 percent this week from a year earlier, even as ticket prices for leisure travel were little changed, said Susan Donofrio, a Macquarie Group Ltd. analyst.

“Airlines are going to start targeting ancillary revenue, the baggage fees and all the other stuff, along with base fare increases as we head into the fall,” Donofrio said in an interview.

Investors have been betting that the push will bear fruit after dumping airline shares during the first half of the year. A Standard & Poor’s index of the five biggest U.S. airlines has extended gains in August after jumping 11 percent in July, the biggest monthly gain since late 2016. The gauge was little changed Wednesday.

Profit Pressure

The industry’s annual profit peaked in 2015 and is headed for a third straight decline this year, according to Airlines for America, which represents companies such as American Airlines Group Inc. and United Continental Holdings Inc.

The three largest U.S. carriers -- American, United and Delta Air Lines Inc. -- are likely to follow JetBlue in raising checked-bag fees, said Jay Sorensen, president of IdeaWorks Co.

“I would not be surprised to see that, in the course of the next week, all three jump on board,” Sorensen said.

United generated $3.39 billion last year from bag fees and other products and services priced separately from tickets, according to IdeaWorks. Delta got $2.38 billion while American brought in $2.2 billion.

Canadian carriers are making similar moves. Air Canada is increasing checked-bag fees starting Oct. 5 to help offset increasing costs and keep overall ticket prices competitive, spokeswoman Isabelle Arthur said in an email. WestJet Airlines Ltd. raised its bag charges within the last week.

Pricier Fuel

Airline passengers who purchase more expensive fares or have reached a certain level in a loyalty program generally are exempt from at least some checked-bag fees.

Jet fuel prices have advanced 26 percent over the last 12 months to $2.22 a gallon. While strong competition and robust growth in the seat supply kept carriers from adopting broad fare increases during the busy summer travel season, many airlines are trimming expansion plans for the rest of this year and into 2019. The higher prices are expected to add $2 billion to American’s fuel costs this year.

Airlines typically face a lag of as much as 12 months before such adjustments help them raise fares more easily.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

©2018 Bloomberg L.P.