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Texas Air Also Hikes Fares; High Travel Demand Cited

July 21, 1987|ROBERT E. DALLOS | Times Staff Writer

NEW YORK — Texas Air Corp. has become the latest major airline to announce fare increases, and the current high demand for air travel was said by analysts Monday to be the primary reason behind the moves.

The recent wave of fare hikes has been relatively small, with both of Texas Air's subsidiary airlines--Eastern and Continental--saying over the weekend that they would increase one-way prices by $2 to $8 starting Aug. 1. This follows a trend set last week by Northwest Airlines and followed by several other major carriers.

The airlines say that rising fuel prices are a major factor in the higher fares; the cost of fuel represents about 20% of airline overhead.

And, indeed, jet fuel prices have risen to about 63 cents a gallon from the 55 cents a gallon that was the average last year. Each cent added to the price of a gallon of fuel means an annual cost increase to the industry of $125 million to $130 million. Thus, the 8-cent increase could result in 1987's fuel bill being $1 billion higher than that of 1986.

But analysts think that the growing number of airline passengers--both business and pleasure travelers--is a more important reason for the recent air fare increases. The analysts noted that, if the airlines were not carrying a relatively large number of passengers, they would not be able to pass the higher fuel prices along to the consumer in the form of higher ticket prices.

"In my opinion, strong demand is what brought about the fare increases," said Timothy Pettee, airline analyst with the Wall Street brokerage firm of Bear, Stearns & Co. "When demand is up, they raise their fares. When demand is down, they lower their fares."

Airlines measure passenger traffic in terms of "revenue passenger miles"--one paying passenger carried one mile--and Pettee said the industry figure for revenue passenger miles rose 12% during the first three months of this year. In the second quarter, it went up 15%. In the third quarter, he said, traffic is expected to soar an additional 10% to 12%.

In June, the nation's airlines set a single-month record for revenue passenger miles. The 10 major carriers had combined revenue passenger miles totaling 32.7 billion, topping the previous high of 32.6 billion, recorded last August.

High Load Factors

According to Edward Starkman, an airline analyst with the investment firm of Paine Webber, in June the airlines were flying 65% full, on average, a relatively high percentage. American Airlines, he said, had a load factor of 69%, compared with 64.7% in the 12 months ended last September; USAir's June figure was also 69%, compared with 59.8% for the 12-month period, and United Airlines' was 67.4%, compared with 64.8%.

"When you start to achieve load factors at that (high a) level," he said, "The incentive is to raise fares in order to rake in all the profits you can in good time."

Despite the boosts, an airplane ticket is still cheaper than it was two years ago. According to Airline Economics, a Washington, D.C., consulting firm, air fares dropped 5% from 1984 to 1985 and an additional 7% between 1985 and 1986.

"We began this year with fares down 12% to 13% from 1984 levels," Lee R. Howard, the firm's executive vice president, said. "We're saying that fares for the entire year will be (from) flat to up 2% over those of 1986. So that is still a pretty good bargain. In real dollar buying power, fares would be down over 1984."

Although all of the major airlines are expected to announce fare increases in the $2 to $8 range by Aug. 1, industry observers said that how the airlines do after the busy summer season will determine fare levels after Labor Day. If there is a sharp drop in business, another fare war is likely to result. But, whatever happens, it is clear that all of the airlines must follow the leader.

And Texas Air is so big that it has become the industry's price leader. Airline Economics said the four fare increases initiated this year by Texas Air have been sustained but most of the increases attempted by other carriers have not had the same success because of competitive pressure applied by the big Texas holding company.

Four of the fare boosts were withdrawn after Texas Air refused to match them. One was not implemented in most markets served by Texas Air; two were sustained, and one of those was modified.

But even Texas Air would now like to see fares increase. That is because it is losing so much money and is so heavily burdened with debt.

According to Scott J. Drysdale, an airline analyst with the Seattle office of the San Francisco brokerage house of Birr, Wilson & Co., Texas Air's total long-term debt is $4.8 billion, which means annual interest payments of $400 million to $500 million.

Besides, the low fares that it has been forcing on the industry have hurt Texas Air possibly more than they have its competitors. One airline executive who asked not to be identified noted that Texas Air has lost about $127 million in the first half of this year.

And its bankers are concerned, he said. They are telling Texas Air: "You'd better raise your fares."

HOW AIR FARES COMPARE

One-way fares Current After Aug. 1 United Airlines Los Angeles to San Francisco First class $197 $199 Regular coach $122 $124 Los Angeles to Chicago (O'Hare) First class $712 $720 Regular coach $477 $485 Los Angeles to New York First class $802 $810 Regular coach $537 $545 American Airlines Los Angeles to San Francisco Executive class $158 $160 All other fares on these routes are the same as United's. Continental Airlines Los Angeles to San Jose First class $132 $134 Regular coach $99 $101 (Continental does not fly from Los Angeles to San Francisco) Los Angeles to Chicago (O'Hare) First class $397 $405 Regular coach $300 $308 Los Angeles to New York First class $517 $525 Regular coach $347 $355

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