A chart concerning airline fares in yesterday's Business section mistakenly indicated that several air carriers were planning to implement fare increases yesterday. In most cases, those increases were postponed one week to Aug. 22 or 23. (Published 8/16/90)

For airline industry executives, it is the worst of all worlds.

As the peak travel season comes to an end, U.S. carriers are grappling with weak ridership and a sudden escalation in jet fuel prices.

Yesterday, the outlook turned even more grim when the weakest airlines launched a new fare war in a desperate bid to gain market share. Industry watchers are bracing for one distinctly possible outcome: a shakeout of the weakest airlines.

That scenario, and the likelihood that fewer carriers may ultimately mean higher fares, surely is on the mind of Transportation Secretary Samuel M. Skinner as he begins meeting with the heads of four U.S. airlines in separate meetings today and tomorrow. "I am concerned about the effect of rising airline fuel costs both on the financial position of the industry and on the traveling public," he wrote them last week.

Unfortunately, there may be little the industry can say to reassure him.

The air travel market is now so weak that none of the major carriers has been able to make last week's announced fare increases stick. A host of airlines, prompted by struggling Eastern and Trans World Airlines, have announced discounts and postponed fare hikes of 5 percent to 10 percent intended to offset fuel costs that have climbed 30 percent to 40 percent since the Iraqi invasion of Kuwait two weeks ago.

Airline consultants, analysts and former executives describe an industry largely unprepared for and vulnerable to the Iraqi-inspired oil shock, despite the lessons of previous years. Mainly, they say, stiff competition brought on by deregulation has made it difficult to keep fares in line with escalating costs, particularly in the past year.

In addition, U.S. carriers have proven less adept than their European competitors at using the sophisticated market strategies to hedge against rising fuel costs. Such measures may save European carriers hundreds of millions of dollars this year, industry experts said.

"It's one of the chief frustrations for airline operators, the whole fuel situation," said Lee Howard, chief executive of Airline Economics, a Washington consulting company.

For airlines, Saddam Hussein's invasion of Kuwait and the resulting price shock could hardly have come at a worse time. The airlines have absorbed an industry-wide loss estimated at $685 million for the first quarter of 1990 alone and had the most devastating nine-month period in its history, according to Airline Economics.

In dollar terms, the 40 percent jump in the spot market price of West Texas Intermediate crude oil to $26 since Aug. 2 will cost the industry an additional $4.8 billion on an annual basis, or as much as $580 million for large carriers such as United Airlines.

The news is bleakest, however, for weak carriers such as Eastern, Trans World Airlines and Pan Am. These airlines, already facing losses and increasing costs of credit, now must contend with flying the oldest and least fuel-efficient aircraft fleets.

"This is just going to add to the woes of the weak carriers, and, if it continues long enough, it will hasten the consolidation of the business," said Lee R. Howard of Airline Economics. The crisis "is largely a case where the haves will do reasonably well and the have-nots will suffer," said Paul A. Turk, director of publications for Aviation Marketing, an Arlington-based airline consulting firm.

But the roots of the crisis extend deeper and have to do with the more competitive climate brought on since the industry was deregulated a decade ago, industry observers say.

Before deregulation, airlines could set their fuel costs up to a year in advance. Now, they must contend with daily, even hourly swings in fuel costs set by oil refineries. Even among U.S. carriers, prices vary widely from about 55 cents a gallon to 70 cents as recently as last winter. Immediately after the Iraqi invasion, airlines watched as helplessly as American motorists as refineries jacked up costs.

But the airlines had alternatives. According to Airline Economics's Howard, "They could have raised fares earlier," such as last year, when record ridership could have supported increases vital to offset rising operating costs. Failure to do so led to drastic losses industry-wide, he said.

This week, the airlines' efforts to boost fares by up to 10 percent began to founder when TWA and Eastern slashed prices in an attempt to win over travelers. Northwest Airlines announced yesterday it is lowering domestic fares for travel after Labor Day in a move matching TWA and Eastern's price reductions. In Dallas, American Airlines said it follow the lead of Eastern and TWA but make its fare cuts effectively immediately on all domestic flights.

"If oil holds at $25 per barrel, there will have to be another increase {in prices}," said Howard, one that brings expenses and income into line.

Some carriers could have found themselves less vulnerable to such market swings had they used the financial markets to protect against climbing fuel prices. Hedging, a practice popularized by small European carriers last year, essentially allows airlines to lock into prices for up to two years on the mercantile exchange by paying a premium to other market players.

U.S. airlines, said one financial services expert, "have had a hard time breaking away from the notion that hedging is speculative." Thus far, only the largest carriers have engaged in short-term hedging.