Air Transport World

Fares: to raise or not to raise; airlines are seen as needing to boost profit margins but price increases such as those of last year obviously aren't the answer.

Airlines are seen as needing to boost profit margins but price increases such as those of last year obviously aren't the answer.

Can U.S. airlines expand if profits are less than those of even the lowly grocery industry and real--inflation-adjusted--fares start going down again?

Airline Economics, Inc., says no. If the airlines don't start coming closer to U.S. manufacturing's net margins--4.6% from 1978-88--rather than their own measly 1.6% for the same period, they won't have enough money to re-equip, says Chairman George James. The situation that has prevailed throughout the airlines' history, when steadily increasing productivity, much of it linked to new aircraft, produced commensurate reductions in fares, cannot continue, he insists. Costs are going up and so must fares. "The airlines will have to price higher, 4-5% a year," he suggests, "in order to keep up with costs."

Actually, the yield line started flattening out in the latter 1980s (see graph). In other words, the airlines started raising fares in line with inflation. As a result of that flattening, the six top major carriers in the industry, American, Continental, Delta, Northwest, United and USAir, are in pretty good shape--or we until last year's fourth quarter. The six "almost match the manufacturing [profit margin] numbers," says James.

But the picture is not as good as it sound on the surface, cautions James. "When the six best [airlines] only perform at the average of the rest of [U.S.] business, it is not good." They should do better than average, he feels. …

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