U.S. '08 airfare increase on track to outpace '07

By Kyle Peterson

CHICAGO (Reuters) - A two-year string of domestic fare hikes by major U.S. airlines has picked up steam this year, baffling experts who predicted that economic pressures would choke off travel demand and put an end to fare increases.

Data from FareCompare.com, which tracks airfares, show that the number of successful fare hikes in 2008 is on track to surpass the total number of increases in all of 2007.

"I keep expecting it to slow down, but it's not," said FareCompare Chief Executive Rick Seaney on Tuesday. "It's pretty amazing that they've been able to fire out so many increases this year."

FareCompare data show that in 2008 so far, the six largest airlines initiated 15 successful fare increases, compared with 17 for all of 2007.

Last week, UAL Corp's (UAUA.O) United Airlines added a $20 fuel surcharge on most of its route system. That increase was broadly matched by rivals like Continental Airlines (CAL.N) and Northwest Airlines NWA.N.

Fare hikes are the most direct way airlines can offset the soaring fuel bills that threaten to tip the industry into a new crisis.

Unfortunately for airlines, however, fare hikes have not come close to keeping pace with rising fuel costs, and airlines are suffering. Jet fuel prices are directly linked to crude oil futures, which notched a record high of $145.85 a barrel last week on Nymex.

FareCompare defines a successful fare hike as one that has the commitment of all six legacy carriers and applies to at least two-thirds of their routes. Typically, one airline hikes its fares and waits for others to match. If too few carriers match, the hike may be rescinded.

Carriers often tweak their fare hikes to accommodate competition from low-cost carriers like Southwest Airlines (LUV.N), that generally refrain from industrywide increases.

Airline experts and even some executives have warned of the potential for flagging travel demand if a slumping U.S. economy puts a dent in business and leisure travel budgets.

Seaney said, however, that if oil prices remain high and if consumers continue to tolerate rising fares, airlines could push through as many as 30 fare hikes this year.

"Basically it's sort of a game of chicken that the airlines are playing," he said.

(Reporting by Kyle Peterson, editing by Richard Chang)