The price of a barrel of oil keeps rising ($106+ as of this writing) which is putting a crimp in airline profits – or erasing them altogether.
Southwest: No Profit in 1st Quarter
Southwest, for example, now says it does not expect to earn a profit in the first quarter of 2012 because fuel costs were nearly 5 percent higher than anticipated. Media reports also quote Southwest executives as saying demand for spring travel weakened late last month but no one seems certain if that’s an ominous trend or a minor distraction.
Delta, United Feeling Some Pain
Delta, meanwhile, does expect to turn a profit but now says it will be less than its original forecast and possibly as much as half of what was predicted.
At the same time, United executives say they will “cut flying” by as much as one-and-a-half percent. Cutting capacity is a standard strategy to keep profits up by filling empty seats to drive up demand.
As airfare analyst Rick Seaney points out, airline ticket prices have been on the rise for some time now, rising about 17 percent overall in 2011 and up an average of about 4 percent so far this year alone.
“We’ve also seen four attempted airfare hikes already in 2012,” said Seaney, noting that two of these attempts were a success. “We will likely see more.”
Passenger Demand Key to Airfare Prices
Meanwhile, US Airways President Scott Kirby has been quoted as saying, “I do think it’s still a strong demand environment,” meaning there is little incentive to discount. All this could change depending on what happens when during the upcoming peak shopping season for summer vacation travel.
As analyst Seaney said recently, “If you could afford to fly last summer, you’ll probably be able to afford it this vacation season,” but he warned that if prices continue to rise, there may well be passenger push-back. If that happens, demand will dry up to a certain extent, and the airlines will be forced to do the unthinkable – fly with empty middle seats – or more likely, lower their prices.