US airlines see encourging signs despite fuel price spike

Washington DC
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US Airways executives are encouraged by signs that domestic demand is holding up despite a spate of new fare increases adopted across the industry.

Southwest Airlines initiated a new fare increase on 26 March, the fourth such pricing hike so far this year that was quickly matched by competitors.

That follows a series of eight broad-based fare increases by Southwest and several domestic carriers last year.

After seeing signs of softening forward bookings in February, Southwest executives openly worried that the fare increases were beginning to outpace demand.

But David Kerr, US Airways chief financial officer, sees Southwest's decision to raise fares again on 26 March as a potential sign that demand is keeping pace.

"The increase [earlier this week] was a good sign for the industry," Kerr says, speaking to an investors group on 27 March.

US Airways also was concerned by signs of weak demand in the early part of February, Kerr says, but not anymore.

"That weakness has gone away," he says. "Bookings are back strong again."

US Airways has no firm explanation for what caused demand to falter in February, Kerr adds, noting that domestic airlines experienced a similar mysterious drop last June.

If demand continues to hold up despite fare increases, it means airlines can pass on more of the fuel price costs that are threatening the industry's balance sheets this year.

One reason demand may be holding is up an unusual restraint on capacity growth across the industry. Rather than chasing opportunities to grow market share, airlines are either cutting back slightly or staying flat. Two exceptions are Alaska Airlines, which is growing its traffic to Hawaii, and JetBlue's ongoing expansion in Boston and the Caribbean.

According to US Airways estimates, industry-wide capacity is down by 0.5% in the US domestic market. US Airways has increased capacity by 1%. However, the carrier is not adding new routes, but taking delivery of larger Airbus A321s to replace Boeing 737 Classics.

"This is all really good for revenue performance," Kerr says. "All we've seen is these numbers come down."