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) - Get Report

,

America West

(AWA)

,

American Airlines'

parent

AMR

(AMR)

and

Continental Airlines

(CAL) - Get Report

all soared to second-quarter profits without the benefit of special items, joining perennial profit-makers

JetBlue Airways

(JBLU) - Get Report

and

Southwest

(LUV) - Get Report

.

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) - Get Report

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.

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.

Delta's move comes about one week after rival JetBlue announced a fare sale of its own, offering fares as low as $29 one-way.

Network carriers are trying to cope with the still-difficult environment by boosting capacity on international routes and restraining it domestically. International routes, which lack the low-cost competition and overcapacity that continues to pressure domestic fares, tend to be more lucrative.

Continental claims to be growing internationally faster than any other carrier this year, and analysts are paying attention. It's also adding more first-class seats on some of its domestic routes.

"Continental is showing the other legacy carriers how to survive the continuing erosion of profitable point-to-point markets," writes Roger King, analyst at Credit Sights, an independent research firm based in New York that does no investment banking. "Continental is expanding where the low-cost carriers are not in the competition -- international and first-class."

King notes that Continental kept its domestic capacity flat in the second quarter from a year before, while boosting capacity by 15% on routes over the Atlantic and 16% over the Pacific. Although yields, which measure average fares, increased only 1% domestically, they gained 7% on Continental's international routes, he points out.

Concessions

Continental is not alone, however. AMR, Northwest and Delta are all boosting international flights with similar hopes of improving revenue.

Continental wouldn't have scored its second-quarter profit without new labor agreements it signed earlier this year. The concessions are designed to save the carrier $418 million a year.

Labor savings -- or the lack thereof -- remain perhaps the biggest issue for Northwest, which has only been able to achieve $300 million of its $1.1 billion annual target.

During Tuesday's conference call, the airline's executives made clear the urgency of getting further concessions. They said the airline's nonfuel unit labor costs are now the highest in the industry, adjusted for stage length. They also reiterated statements that Northwest could be forced to file for bankruptcy if it can't get the cost savings it's targeting.

A key variable for Northwest and Delta remains what happens to the pension reform legislation in Congress. Both are hoping airlines will get extra time -- they originally appealed for 25 years -- to fund their pension obligations. Both have warned they may have to file for bankruptcy without such an extension.

So, even as most airlines enjoy a better-than-expected quarter, turbulence remains on the horizon, with crippling fuel costs, potential bankruptcies and fare-pressuring domestic competition.