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Airline Fares Increase in January as Labor Costs Rise

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Markets were rather shaky in the first month of 2016, hurt by weak oil prices apart from other global concerns. In sync with the lows prevalent in the broader markets, the month of January was not a very happy one for airlines either, going by the data released by the Bureau of Labor Statistics (BLS).

Data suggests that average airfares in the U.S. for Jan 2016 were up 1.2% (on a seasonally adjusted basis) from the comparable figure in Dec 2015. However, the reading on airfares for the month showed a 1.7% year-over-year decline on an unadjusted basis.

Fare Hikes in January to Counter Higher Labor Costs?

The sequential increase in average airfare reading in Jan 2016 is not entirely surprising as major carriers had hiked fares during the month. From the customer standpoint, this definitely did not call for celebrations. According to media reports, the Atlanta, GA-based Delta Air Lines (DAL - Free Report) kick-started the air fare increase by launching a $3 (one way) increase in ticket prices for domestic flights.

Other airline heavyweights like American Airlines (AAL - Free Report) , United Continental (UAL - Free Report) and Southwest Airlines (LUV - Free Report) soon followed suit. This was the first price hike across the industry since June 2015. Soon after, another round of price hike was observed later in the month.

The twin price hikes have apparently made air tickets costlier by up to $12 (round trip). Although this appears uncalled for given that oil prices have remained weak, increased airfares seem to be the tool resorted to by carriers to counter rising labor costs. Fourth-quarter 2015 results of Delta, United Continental, Southwest Airlines and Alaska Air Group (ALK - Free Report) demonstrate the fact that expenses related to salaries, wages and related costs are currently the largest cost component for carriers, having relegated fuel expenses to the second position.

Moreover, carriers have also struggled on the revenue front. So the twin fare hikes can also be deemed an attempt by carriers to counter sluggish top-line growth.

2015 Air Fares Pocket-Friendly on Cheap Oil

Low oil prices had contributed to air fares declining substantially in 2015. According to data released by the Department of Labor, airfares saw a record downward revision in 2015 since 1987. Ticket prices fell by at least 15% in 2015 mainly due to low oil prices.

Crude prices are currently hovering around the $30-a-barrel mark. This represents a significant decline from the approximately $105 per barrel witnessed in Jul 2014. The fall in oil prices had resulted in massive savings for carriers as fuel costs account for a significant chunk of an airline's operating expenses.

Declining PRASM: A Worry for Carriers

Even though plunging oil prices have resulted in significant bottom-line expansion for carriers, the top line has been under pressure. Carriers have witnessed continuous declines with respect to one of the key revenue metrics – passenger revenue per available seat mile (PRASM: a measure of sales relative to capacity for a carrier).

Lower fuel surcharges on international flights due to weak oil prices have been one of the reasons behind the persistent decline in PRASM. In fact, PRASM woes were mainly responsible for the NYSE ARCA Airline index shedding over 17% of its value over the past year, despite the benefit of low oil prices.

PRASM Woes: Not a Thing of the Past

With oil prices expected to remain weak going forward, we believe worries related to PRASM will continue to hurt carriers notwithstanding the month-on-month increase in air fare recorded in January. This can be made out from the fact that United Continental expects PRASM to decline in the range of 6% to 8% in the first quarter of 2016.

American Airlines Group has projected a 6% to 8% drop in PRASM for the first quarter. Low-cost carrier Virgin America , whose fares declined almost 9% in the fourth quarter of 2015, projects its PRASM to decline in the range of 3% to 5% in the first quarter.

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