Airlines Face Bleak Horizon

The second quarter brought sweet relief to most major U.S. airlines as strong passenger demand, and in most cases higher fares, put them in the black.

But the high price of fuel remains a giant monkey on the industry's back, and analysts expect it will likely push many carriers into the red in the third and fourth quarters.

AirTran (AAI), Alaska Air (ALK), America West (AWA), American Airlines' parent AMR (AMR) and Continental Airlines (CAL) all soared to second-quarter profits without the benefit of special items, joining perennial profit-makers JetBlue Airways (JBLU) and Southwest (LUV).

Most of these carriers blew past Wall Street estimates, with the exception of Alaska, which came in a penny shy, and JetBlue, which reported in-line results. Some analysts had doubted until recently that AMR and America West would even be profitable.

So far, Delta Air Lines (DAL) and Northwest (NWAC) are the odd airlines out, having reported big losses, although they could be joined by bankrupt carriers US Airways (UAIRQ) and UAL (UALAQ), which are expected to report within the next couple of weeks.

Fuel costs and tough competition overwhelmed Delta's dramatic cost-cutting efforts, while Northwest executives blamed labor costs, saying expenses in that area are uncompetitive with rivals who have already slashed wages and benefits.

Oil Costs Remain

The industry as a whole benefited from booming passenger traffic and a string of fare increases that began early in the year.

"There are three reasons for the general improvements in industry results off of a very weak second quarter of 2004: heavy traffic, airlines' cost-cutting efforts taking effect ... and better-than-expected unit revenue resulting from the recent series of modest ticket-price increases," Ray Neidl, an analyst at Calyon Securities, wrote in a recent research note.

Although the outlooks have improved for some carriers, the high price of oil remains a sticky issue. It will likely cause losses at all but Alaska, Continental, JetBlue and Southwest in the third quarter, according to current analyst estimates from Thomson First Call. Of these four, Alaska, JetBlue and Southwest all benefit to some degree from fuel hedges that reduce their exposure to high crude oil prices.

Meanwhile, AMR provides an example of the burden airlines have been shouldering with fuel prices at or near record highs.