Airlines Face Bleak Horizon

In the second quarter, the world's largest airline saw its fuel bill surge $434 million from a year before as its average price for a gallon of jet fuel jumped 47% to $1.63 a gallon. Things aren't improving, either; AMR expects to pay more than $1.80 for a gallon of fuel in the third quarter.

Another example comes from Continental. Even though analysts believe the airline is on track to follow its strong second-quarter performance with a third-quarter profit, Continental executives took pains last week to point out the carrier is still headed for a "significant" full-year loss as fuel expenses remain at painfully high levels. Recent fare increases have certainly helped, but they don't fully offset the rising cost of fuel, the executives say.

In the face of high fuel costs, airlines are stepping up conservation efforts. For example, Delta's schedule overhaul at its Atlanta home-base earlier this year has reduced plane taxi-times, while the airline has been installing lighter seats and removing heavy ovens from planes.

Still, industry losses will escalate in the fourth quarter, a seasonally weaker period that doesn't benefit from the strong vacation traffic of the summer months.

One trend analysts are paying close attention to is the degree to which fares decline for post-summer travel.

During Delta's earnings call last week, executives warned that end-of summer fare wars could prove challenging, but the airline got into the act Monday, announcing a fare sale for tickets from early August until mid-November.

"While not a surprise, we would have preferred the timing to be later in the summer rather than now," reads a research report from Helane Becker, an airline analyst at the Benchmark Co., a New York-based brokerage that does no business with companies it covers.