Airline profit likely to drop in 2008 on higher fuel costs

WASHINGTON -- 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 profit 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 Chicago-based United Airlines on Friday said 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.

On Friday, AMR closed down 14 cents to $13.21. UAL rose $1.40, or 4.4 percent, to $33.15, despite hitting a new annual low of $29.46 in earlier 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.