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Airline Industry Losses to Widen In 1st Quarter

By Keith L. Alexander
Washington Post Staff Writer
Thursday, April 14, 2005; Page E01

Their planes are fuller and their operations are more efficient, but most airlines will report larger losses in the first quarter than in the comparable quarter last year for a total industry loss of about $2 billion, the Air Transport Association said yesterday.

The culprits: high fuel costs and low ticket prices as the airlines have resorted to slashing fares in sharp competition to fill seats.

High fuel costs and low ticket prices are hurting airlines. (Gregg Newton -- Reuters)

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The industry's loss is expected to exceed last year's first-quarter figure by $500 million, the association said. Oil prices in the first three months of this year averaged about $51 a barrel, 40 percent higher than in the first quarter last year.

The widening losses could prompt more cost-cutting from an industry that has repeatedly shaved jobs and shrunk operations over the past several years. Fuel-guzzling aircraft could join the hundreds already grounded, resulting in fewer flight choices for travelers.

"The first quarter erased any hopes that there would be a materially lower fuel price with which to work this year," said John P. Heimlich, the association's top economist. "This puts more jobs at risk for the year and accelerates fleet retirements and capacity cuts."

As the airlines release their first-quarter results over the next few weeks, Southwest Airlines is expected to be one of the few among the top 10 carriers to report a profit. The nation's largest budget airline is projected to report earnings of about $40 million, according to a consensus of airline analysts surveyed by Thomson Financial. That surpasses the $31 million Southwest earned in the first quarter of 2004.

By contrast, AMR Corp., parent of American Airlines, the world's largest carrier, next week is expected to report a loss of about $400 million. Arlington-based US Airways -- despite cutting more than $1 billion in employee wages and benefits in bankruptcy court -- is forecast to announce a loss of $218 million.

The doldrums persist even though the top six traditional airlines -- American, Continental, Delta, Northwest, United and US Airways -- filled an average 80 percent of their seats between January and March, up from 75.8 percent during the same period a year ago, according to Calyon Securities. The first quarter is traditionally one of the airlines' worst periods. But it was boosted by strong travel during the Easter holiday, which came earlier this year.

While the airlines sold more tickets, the seats were offered at the lowest prices in a decade as the major carriers try to fend off an unrelenting assault from budget carriers such as Southwest, JetBlue and AirTran. The Internet also is pressuring prices downward by enabling passengers to shop easily for the lowest prices.

The airlines have been able to raise a few fares since January, pushing up some domestic round-trip tickets by as much as $60, said Michael Linenberg, a Merrill Lynch analyst. The bulk of the increases were on transcontinental flights and on routes up and down the West Coast. Some international fares also rose. Linenberg said routes along the East Coast remained under intense pricing pressure.

Historically, labor has been the airlines' biggest expense, followed by fuel. But after massive cuts in worker costs over the past year -- and a continuing rise in oil prices -- fuel is poised to surpass labor as the biggest expense for many carriers.

If fuel prices push higher, low-cost carriers such as JetBlue, Air Tran and even Southwest may be forced to start looking for ways to cut their costs to remain profitable, airline experts say. "Some of the low-cost carriers are going to have trouble this year if oil stays this high," Heimlich said.

Southwest is expected to report the largest profit of any carrier for the quarter, largely because of its hedging of fuel prices. The airline has reduced its current price for fuel by hedging 85 percent of its supply. Even still, paying full price on the rest has cut into profits.

United Airlines said its fuel costs could exceed its projections by $700 million this year. US Airways said recently that fuel could add $500 million to its costs. The fuel burden could impede both airlines in their efforts to find investors to help them emerge from Chapter 11 bankruptcy protection. United, which has been in bankruptcy since December 2002, hopes to emerge by the fall. US Airways, which has been under court protection since September, had projected to emerge by June 30 but now says the date could be pushed back to at least the fall.

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