Carriers eye higher fares, capacity cuts as oil prices skyrocket

Executives of major airlines attending a Goldman Sachs conference in New York last week said they are preparing strategies that will help them cope with soaring crude oil prices. Their current strategy is to pass along the increases to passengers. Major carriers have introduced a series of small price increases in recent weeks, like American’s $20 roundtrip fare hike October 31, and United’s announcement last week that it was incorporating a $10 roundtrip fare hike to cover higher fuel costs. International carriers will also be boosting their already hefty fuel surcharges – e.g., Lufthansa said last week that effective November 14, it will raise its fuel surcharge on long-haul flights from 66 to 76 euros per segment (i.e., from $97 to $113). Airline executives said they realize that after a certain point, increasingly higher fares will start to dampen demand – and when that happens, they may have to reduce flight operations. Executives said they are already considering cutbacks in their planned capacity growth for 2008, but more might be needed. United’s CFO told the conference that the company was already planning to shrink domestic capacity by 3 to 4 percent next year, but that if demand falls significantly, United could ground up to 100 aircraft – more than one-fifth of its fleet. Northwest officials said they were also prepared to ground some planes if demand falls off, noting that the company’s post-bankruptcy business plan was based on a projection of oil prices at $63.50 a barrel in 2008.