Susan Carey Wall Street Journal
New Fares and Fees Seen Lifting Airline Revenues
July 10, 2017
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  • U.S. airlines are raking in more per mile they fly a passenger for the first time in years, thanks to new fare classes and customized services that are squeezing more revenue from each customer.

    In the second-quarter results they will begin to report this week, airlines have told investors to expect the first broad uptick in three years in the amount taken in for a passenger flown a mile, or a seat flown a mile. These closely watched “unit revenue” metrics had suffered amid a price war sparked by low fuel prices and the rapid expansion of discount carriers.

    Now big airlines are expanding “basic economy” fares to compete with discounters, while also tapping new revenue streams from fees and premium ticket classes that offer more comfort and exclusivity.

    “You’re seeing increasing product and customer segmentation, which is generating higher average fares,” said Bryan Terry, managing director of travel and transportation for PricewaterhouseCoopers LLP.

    American Airlines Group Inc., AAL -0.70% Delta Air Lines Inc. and United Continental Holdings Inc. all are expected to show unit-revenue gains in the second quarter compared with big declines in that period a year earlier. Delta, which will report second-quarter results on Thursday, told investors last week to expect the first unit-revenue growth since the fourth quarter of 2014.

    Discounters JetBlue Airways Corp. and Spirit Airlines Inc. are forecasting unit-revenue growth of at least 4% after double-digit declines a year ago. Hawaiian Holdings Inc. has forecast a unit-revenue increase of as much as 10.5%. Southwest on Monday reaffirmed guidance for growth of up to 2% in the second quarter, disappointing some investors hoping for a higher target.

    Nevertheless, such broadly positive results would help put the airline industry on track for its eighth straight year of profits in 2017, a record streak in a traditionally volatile industry buffeted by unpredictable changes in fuel prices, demand and global economic conditions. Many airline stocks are trading near their one-year highs.

    Many industry watchers see last year as a low point for airlines, coming at the end of a heated fare war. At the time, carriers blamed everything from geopolitical turmoil, the strong dollar and overcapacity for their poor performance. Only Southwest and Hawaiian eked out small unit-revenue gains for the second quarter last year.

    “The second quarter of 2016 was darn near a trough,” said Kristopher Kelley, an equity analyst at Janus Henderson Group PLC.

    The tide began to turn early this year. Merrill Lynch expects steady unit-revenue gains through the year. Cowen & Co. thinks the second quarter will be a peak, due in part to more domestic airline capacity scheduled to come on line later this year.

    As discount carriers bring budget fares to more markets, American, Delta and United are using basic economy fares to attract more frugal travelers. These fares don’t include many standard perks such as standing by for a different flight or receiving advanced seat assignments.

    The growth of discount carriers has pushed domestic ticket prices near historic, inflation-adjusted lows, even with change fees and checked-luggage prices added in. At the same time, major airlines are offering more options to travelers willing to pay more. Delta and American are introducing “premium economy” seats on international routes that offer more perks than plain coach. JetBlue , long a single-cabin airline, offers a luxury first-class called Mint on some routes that is boosting its unit revenue.

    Airlines are also selling priority boarding and upgrades to business- and first-class, instead of awarding those perks to frequent fliers, said Mr. Terry of PwC. Even Southwest, which doesn’t charge baggage fees for the first two bags, is selling early boarding access.