Revenue Management: Dark Skies Ahead for Airlines

Excerpted from WSJ, “After Rough Year, Airlines Bet on More Fees, Lower Fuel Costs” By Susan Carey, January 30, 2009

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Four more U.S. airlines reported fourth-quarter losses, capping a tough year, but the industry is hoping that new fees, higher ticket prices and lower fuel bills will bring improved results in 2009.

Airlines have begun boosting revenue by raising their fees for incidental services and charging for perks that were once included in the price of a ticket … US Airways Group hopes to generate as much as $500 million of such ancillary revenue this year.

So far, the industry’s capacity reductions have enabled carriers to raise prices and report fairly healthy gains in unit revenue, or the amount taken in for each seat flown a mile.

But gyrating oil prices and the recession continue to cloud the industry’s outlook. Volatile crude prices gave airlines fits last year as oil’s descent in the second half led to losses on hedging contracts they had entered to guard against rising jet-fuel costs …


The industry faces headwinds, including the challenge of holding down unit costs as capacity is cut and previously profitable international routes turn weaker. The International Air Transport Association … said passenger demand fell 4.6% in December and international cargo traffic dropped more than 22%.  Continental said it is concerned about a deterioration in its premium international business, its business bookings and even some leisure markets.

While Continental, the fourth-largest U.S. airline by traffic, figures its annual fuel bill will drop $2 billion this year, it said it is anybody’s guess whether oil will climb to $150 a barrel or decline to $20 a barrel …

US Airways, the No. 6 U.S. carrier by traffic, reported a net loss of $541 million … with $234 million in losses reflecting adjustments to its fuel hedges. The company expects it will pay $1.7 billion less this year on fuel than in 2008. US Airways plans to reduce its mainline capacity by nearly 6% in the current quarter …

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