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Air travelers see higher ticket prices, competition
By Dan McCue
Staff Writer
High fuel costs, the demise of Independence Air and an overall reduction in domestic capacity by carriers has resulted in substantially higher airfares for business travelers in the tri-county region.
But the emergence of a new low-cost airline serving Charleston International Airport may be just around the corner, according to a leading industry analyst.
In fact, the Charleston County Aviation Authority is deep in discussions with an as-yet unidentified airline that could soon boost the number of carriers serving Charleston to seven, said Sam Hoerter, Charleston County’s airport director.
According to the Air Transport Association of America Inc., the trade association of major U.S. airlines, fares across the United States were up 10.9% in the first four months of the year, compared to the same period of 2005.
In fact, even Delta Airlines, which, along with Independence Air, had long been credited with tamping down airfares to and from Charleston through its Simplifare program, has raised it fares several times since filing for Chapter 11 bankruptcy protection last October, a company spokesman said.
At the same time, the company has raised ticket price caps on its “discount” Simplifare program—which was intended to help the airline compete with low-cost carriers—from $495 and $595, for roundtrip coach and business class tickets respectively, to $599 and $699 in the past year.
“The rise in our fares simply boils down to a case of supply and demand,” said Anthony Black, Delta’s senior manager of media relations. “Here at Delta, we’ve reduced our domestic capacity by 20 percent since last year, while increasing our international capacity by 25 percent. In short, the plane that used to fly between Atlanta and Tampa is now flying between Atlanta and Edinborough, Scotland.”
At the same time, more people this year compared to last are flying across the United States, which means passengers will find seats but they’re not going to find the same low price.
Fares only half the story
But if fare hikes are noticeably higher, they still don’t rival the peak airfares passengers were paying in 2000, said John P. Heimlich, chief economist for the ATAA.
“Yes, fares are climbing higher compared to last year, but if you compare them to the highest airfares have ever been in this country—during the first four months of 2000—then they are actually down 12.9 percent,” Heimlich said.
Prices dropped dramatically in late 2000 and throughout 2001 as the result of several factors combined, including the bursting of the tech bubble, the September 11 terrorist attacks, shifts in corporate travel behavior, the proliferation of Internet shopping tools and expanded competition.
“So you see, everything is relative,” he continued. “Yes, airfares did rise 10.9 percent the first four months of the year, but at the same time, to offer a comparison, the average price of jet fuel rose 129% during that period, rising from 83 cents to $1.91 a gallon.”
Greater efficiencies and reductions in the labor force off-set those costs, but only partially, Heimlich added. “Hence the rise in airfares.”
It was the correlation between fuel prices and airfares that led to the demise of Independence Air and other low-cost carriers that have been liquidated over the years, Heimlich said.
“In the case of an Independence Air, I think their demise was the simple result of their fares being too low to cover their costs, particularly fuel costs,” he said. “Given their costs, which also include things like ticket taxes and landing fees and so on, their fares were simply unrealistic and unsustainable.”
How airfares rise
An illustration of how fares increase occurred in early June. United Airlines announced it was raising its fares on a Friday afternoon, and by the following Saturday several other domestic carriers had followed suit.
That scenario is typical of the economically deregulated industry in which airlines compete against one another and have to obey anti-trust laws, Heimlich said.
“In this industry, there is always one initiator, and I think that’s true of most industries … whether you are selling hot dogs are airplane tickets … one company pulls the trigger and other companies have to decide whether to do the same,” he explained.
“Generally, because the business is so competitive, other airlines like to see what happens to bookings as a result of the fare change,” Heimlich continued. “If it seems favorable—from an industry perspective, revenue positive—then all things being equal other companies will be inclined to follow suit.”
Domestic capacity reduced
Another factor leading to higher fares is simply that domestic seating capacity has been reduced, while international capacity has been increased, said Delta’s Anthony Black.
“That’s tightened the balance of supply and demand,” Heimlich said.
Nationally, according to ATAA statistics, airline seating capacity is down 1.6% in the U.S. this year, but up 4.6% internationally, due to what Heimlich described as a “strong revenue environment” overseas.
“Foreign currencies are strong, there’s no competition from either trains or automobiles, and there’s somewhat less competitive intensity in the trans-Pacific because a lot of the international airlines are still not deregulated,” he explained.
But of course, as any local passenger will tell you, Charleston has historically had higher airfares than other airports in the region.
“I don’t know a lot about individual towns, but in every market you have different supply and demand characteristics,” he said. “It may be a case of one airport providing a greater number of carriers to choose from, it could be a matter of network competition.”
But passengers in the Charleston market may be signaling that airfares have finally reached the level of insustainability. Through April, passenger traffic through the airport is down 14% compared to last year, Charleston’s Hoerter said.
“But last year, remember, was a record year for us, with over a million passengers passing boarding at the airport,” Hoerter said. “Given the demise of Independence Air, which handled 7 percent of our passenger traffic, we’re not surprised to see a drop. In fact, even with the drop, we’re still seeing passenger traffic at the level we saw two and three years ago.”
Charleston capacity increases
But if it’s still unclear whether some potential passengers in Charleston are refusing to fly at premium prices, the region is bucking the national trend in another regard: While the number of seats available nationwide are dwindling, the number that are available for passengers to and from Charleston is actually beginning to rise.
In April, on the heels of Independence Air’s failure, American Airlines started nonstop flights between Charleston and Dallas/Fort Worth, and Delta added daily nonstop flights to Boston and Orlando.
“That daily nonstop to Boston is a very big deal for us,” Hoerter said. “Not only is it one of our top 10 markets, but historically, two-thirds of the passengers on our non-nonstop flights between Charleston and Boston have been Bostonians coming here.”
The Charleston County Airport Authority is actively wooing a new carrier, Hoerter indicated.
“It’s too early to reveal who they are, but I will say the vacuum left by Independence Air is quickly being filled,” Hoerter said.
Heimlich said a new carrier’s interest in the Charleston region—even in light of Independence Air’s failure—is not a surprise.
“Typically, carriers gravitate to areas with growing populations, rising affluence and new businesses moving into an area, all things Charleston is experiencing,” he said. “Also, you’re always going to have new entries into markets in this business because there will always be someone who says, ‘They might have failed, but I know I can do it better.’
Currently there are roughly 30 applications by startup low-cost airlines awaiting review by the U.S. Department of Transportation, Heimlich said.
At the same time, Heimlich said, the distinction between low-cost and other airlines has blurred.
“There are no more meaningful distinctions between airlines,” he said. “The economics of the industry has dictated that everybody be a low-cost airline.”
Whatever airlines come to the Charleston market in the future, they’ll be arriving at a time of “fare compression,” Heimlich explained.
“You’re not going to see deals like $39 one-way tickets and the like, and that’s what people tend to focus on,” he said. “The lower-priced airlines are raising their rates. At the same time, however, the premium airlines are cutting their prices. It may well be that your future low-cost airline will be a former premium carrier whose prices have come way way down.”
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.
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