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Rising fuel costs boost fares, reduce flights

Air travelers face higher fares and reduced flight options as carriers grapple with persistently high fuel costs.

Oil prices dropped slightly on Wednesday, but continued their flirtation with $100 a barrel. Oil closed Wednesday at $97.29.

U.S. airlines, barely out of the their deep post-9/11 slump, have been dealing with unexpectedly high oil prices since Labor Day by pushing up fares and trimming flights.

Average business fares on the nation’s top 280 routes have jumped 8 percent from a year ago, according to price tracker Harrell Associates. And leisure fare prices on those same prime routes are up 26 percent from a year ago. This week, Arizona-based US Airways imposed a $5 across-the-board fare increase on every ticket sold.

Whether that price increase sticks depends on other competitors matching it. But in general, fare increases will continue, because “people keep wanting to fly, even at these much higher prices,” says analyst Terry Trippler of travel Web site TerryTrippler.com.

Ironically, says Trippler, high oil prices are at least partially responsible for the continued strong demand for airline seats.

“With gasoline prices rising, there’re lots more people who decide they’re not going to gas up the Navigator and drive to New York to visit Granny, and decide to go by air,” he says.

Harrell Associates’ Bob Harrell agrees that fares “definitely are going to keep on going up.” At today’s high energy prices, he says, consumers are more accepting of fare increases.

“Five years ago, not two out of 50 people could tell you within 50 percent what the price of a barrel of oil was,” Harrell says. “Today, everybody knows it’s in the $90s. And that plays in the airlines’ favor.”

Through the first 10 months of this year, U.S. airlines have reacted to rising fuel prices by cutting domestic capacity more than 2 percent from the same period in 2006, Harrell said.

The industry defines capacity as the total number of miles it flies available airline seats. When airlines cut capacity, they typically eliminate routes, reduce the frequency of flights or use smaller aircraft. That, in turn, lowers travelers’ options.

Currently, U.S. carriers are paying about $2.70 a gallon, excluding taxes, for each gallon of jet fuel bought on the spot market. But at that price, JPMorgan airline analyst Jamie Baker says the $7 billion pre-tax profit he expected the nation’s big traditional network carriers to earn in 2008 would be wiped out. Baker’s forecast assumed an average price of $68 a barrel next year.

Baker says high fuel prices are likely to continue. With more fare increases and capacity cuts, he says airlines may salvage a 2008 profit of about $3.6 billion.sigAirlines/sig

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