The days of relatively inexpensive, carefree air travel are quickly becoming a distant memory. As the price of fuel increases, so too has the price of airline tickets. While it seems logical that airlines would want to raise their prices in order maintain a profit margin and stymie rapidly approaching losses, the decision to do so could actually be detrimental to customers—personal and business—and airlines both. You don’t need a finance degree to see that in today’s highly competitive airline industry, airlines must balance their expenditures and prices very carefully if they want to remain able to attract customers and fill their planes.

by Thomas Puddephatt

Complicating the decision making process by upper management, the rapidly rising cost of fuel shows no end in sight. According to the International Air Transport Association (IATA), a leading trade association for the airlines, fuel costs are expected to increase by $45 billion over their 2010 levels. During the second week of March 2011, prices rose 5.1 percent from the previous week alone and a 13.7 percent increase over the previous month and 53 percent over last year; more evidence that fuel prices are only going up.

Unfortunately it has already been very difficult for airlines to break even on many routes due to the rising cost of maintenance, staff and fuel. This only serves to exacerbate the problems caused by rising oil and gasoline prices and having an expected negative affect on airline capacity figures and ultimately, the profitability of the airlines.

To counteract this dilemma, some airlines are hedging their bets by buying fuel months or years in advance. According to US Airways chief economist John Heimlich, Delta Airlines has locked in a $2.47 per gallon fuel price and Southwest has bought derivatives in the oil market to reach an average price per gallon of about $2.70. With current prices in excess of $3.20 per gallon, these two airlines have a significant competitive advantage over other carriers that did not hedge prices as effectively, but this is only a temporary delay in a persistent problem.

Fuel reserves are a finite resource, and eventually even the largest airlines will have to pay the current price.While airlines are privy to the rising cost of operating their planes, passengers see only rising ticket prices and canceled or delayed flights. At some point, consumers will inevitably choose to put off or delay their air travel plans as the price becomes prohibitive. This is particularly true for leisure travelers, but also applies to a lesser, but growing extent to business travelers.

Flying for the vacationer or casual traveler has a much more elastic demand than business travel. Companies are much more likely to book a flight, even at high rates, if it means a chance to gain a client or secure some similar gain. However, the need for businesses to engage in travel is diminishing as technology makes it possible for presentations and meetings to be conducted by video conferencing and other advanced communication methods.

While there is still nothing that can come close to a face-to-face meeting with a potential client, businesses are nothing if not frugal, and will cut costs in every way they can. Air travel may be an important part of the overall cost of doing business for most major businesses, but as the economy has weakened and gas prices have increased, business air travel has also declined.

The fact that airlines are already tacking on all sorts of extra charges for baggage, food, blankets and more does not improve their plight. Similarly, dealing with delays and the hassle of going through strict security checks also turns air travelers off. With more and more options for conducting business at a distance, airlines will be forced to either reconsider their pricing strategy or create a marketing strategy that regains the traffic of business clients by stressing the importance of face-to-face meetings and presentations.

However as the cost of flying continues to increase, it is likely that airlines will simply cut service, increase prices and watch helplessly as they see their planes fly with fewer passengers and their profits shrink. From a layman’s perspective, if airlines want to succeed in an environment of rising fuel prices, they must become more customer friendly, improve services and develop a reputation for being worth the prices they will need to charge; and they’ll have to do it now.

Kate Manning is a business major who has worked under others and as a self-employed entrepreneur. She currently owns and manages her own business in Washington state.

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