Airfares stay low, for better and for worse

To fly or not to fly often depends on the price.

Despite a recent nudge upward in fares, ticket costs are still so low that a record number of Americans are opting to hop a flight for a quick business trip or a weekend getaway.

But a dispute is now brewing among analysts as to how long those low fares will last. The outcome will determine not just how much Americans pay for a flight, but the health of the nation's so-called network carriers – the backbone of the US aviation industry with their hub-and-spoke system.

For most of the past five years, the network carriers have been wallowing in red ink, and they're just now returning to profitability. If fares continue to rise, the sector can recover, say analysts. If they don't, it could mean more trouble ahead.

"What's at stake for travelers and for the country is the democratization of air travel that came about as a result of deregulation.... Almost anyone can basically afford to run down to Florida now," says Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa. "That could be jeopardized."

Last week, American Express's "Business Travel Monitor" – a leading aviation industry analysis – reported that the price of hopping a plane made a double-digit jump in the second quarter of this year. Fares were expected to continue to rise well into 2007.

The increased price of jet fuel, combined with a hike in the number of people flying on fewer available seats, had given airlines back their pricing power. That prompted some analysts to predict that Americans' heady days of cheap air travel would soon be a thing of the past.

But other factors have held sway: the recent fall in the price of oil, a slowing economy, and the low-cost carriers' ever-growing share of the marketplace. That combination has prompted some other aviation analysts to predict that instead of rising, airfares could go into a sudden free fall.

"We've got what looks like a perfect storm coming for prices to plummet, at least in the short term," says Mr. Mitchell.

The reason: As the price of jet fuel drops, low-cost carriers will be able to continue to offer lower fares, undercutting their rivals' ability to raise prices. The low-cost carriers' share of the market has already jumped from about 12 percent in 2001 to a projected 28 percent by the end of this year.

Mitchell says that "eye-popping" statistic could mean serious trouble for the nation's network carriers in the short term, and trouble for consumers in the long term.

"Our network carriers' balance sheets are still terrible, especially compared with the global competitors around the world," he says. "If fares drop further, we're probably in for a period of slow liquidation. To the extent that the system shrinks, and these airlines continue to fail, there will eventually be fewer seats available for the kind of rock-bottom prices we've been seeing for all of these years."

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