Airlines brace for difficult year

Airfares are expected to rise as airlines’ profits dip.

WASHINGTON (AP) — Rising fuel costs will be the main culprit cutting into U.S. airlines’ profits this year, with credit market turmoil and slowing passenger demand also expected to hamper the industry worldwide.

High jet-fuel prices will limit U.S. airlines’ combined profitability to between $3.5 billion and $4.5 billion in 2008, compared with last year’s estimated profit of $5 billion, the Air Transport Association said Friday. Meantime, the International Air Transport Association, which anticipates profits for domestic and foreign carriers to fall to $5 billion from $5.6 billion, called signs of weakening passenger demand a “warning bell” for 2008.

To bolster their finances in the face of a slowing American economy, more expensive fuel and higher borrowing costs, U.S.-based carriers must continue to improve fuel and other efficiencies while increasing their share of business and international travel, said ATA Chief Economist John Heimlich.

Higher fares also seem likely.

A spokeswoman for United Airlines said Friday the second-largest U.S. carrier raised domestic fares by $10 to $20 round-trip to offset rising fuel costs. The move is the latest in a series airlines have attempted in recent months as the price of jet fuel has soared.

Shares of major carriers were pummeled in 2007 with big drops coming at the end of the year, as oil prices climbed toward $100 a barrel — a threshold broken earlier this week. Light, sweet crude for February delivery fell $1.96 to $97.22 a barrel in on the New York Mercantile Exchange Friday.

“Rising oil prices have a disproportionately negative impact on U.S. carriers, since oil is traded in dollars,” Heimlich wrote in an e-mail. “Foreign carriers generally have more robust hedge positions than U.S. carriers, leaving them less exposed to the soaring oil prices.”

Shares of American Airlines’ parent AMR Corp. finished down nearly 60 percent at $13.35 on Dec. 31, while United parent UAL Corp. dropped about 32 percent to close at $31.75. Both companies’ stocks also were down in Friday morning trading.

British Airways shed about 43 percent on the London Stock Exchange last year, while Air France KLM lost 23 percent on the New York Stock Exchange. Goldman Sachs last month cut its earnings estimates for most European carriers on expectations of lower prices this year.

Despite the expected decline in U.S. carriers’ profitability, a 2008 profit would mark the industry’s third straight, which has not happened since 1998-2000 and would follow a five-year combined loss of $35 billion, Heimlich said. His profit forecast includes domestic passenger and cargo airlines, while excluding bankruptcy and other charges.

Fuel costs are now the single biggest cost for airlines, followed by labor. Jet fuel accounted for more than a quarter of U.S. airlines’ operating expenses in the second quarter of 2007, and are expected to represent about 28 percent of global expenses in 2007, according to industry officials.

Jet fuel prices hit about $2.65 a gallon in November, compared with $1.80 a gallon a year earlier, according to the U.S. Energy Department.