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Cost Of Fuel Is Big Worry For Airlines

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By HARRY R. WEBER, The Associated Press

Published: January 24, 2008

ATLANTA - Airline consolidation may not be the panacea for the industry amid persistently high fuel prices, but observers say it would help by removing domestic capacity from the system.

As several major carriers talk about possible combinations, Delta and Southwest gave investors another dose of reality, saying Wednesday their future results will continue to be weighed down by fuel costs.
Delta Air Lines Inc. officials were mum on the status of talks with Northwest Airlines Corp. and UAL Corp.'s United Airlines about possible combinations, as the Atlanta-based carrier reported fourth-quarter results hampered by jet fuel costs.
Southwest Airlines Co. reported its profit almost doubled in the fourth quarter, but said fuel costs in the current quarter will rise substantially for the Dallas-based carrier.

"We remain worried by high oil and the U.S. economy," Standard & Poor's airline analyst Jim Corridore said in a research note.

Delta's president and chief financial officer, Ed Bastian, said he thinks cuts in domestic capacity and other cost controls will help offset the effects of higher fuel prices.

Domestic capacity cuts likely would effect Delta's hubs in Salt Lake City and Cincinnati, said Glen Hauenstein, Delta's chief of network and revenue management.

Southwest has tried to fly fuller planes, though its capacity increases outpaced traffic growth in the fourth quarter. That led to emptier, less profitable flights.

Southwest has begun a multimillion dollar initiative to renovate gate areas and marketing. It said Wednesday it will be installing equipment to test on-board Internet service. It has been gradually changing its boarding method from its "cattle call" to assigned spots in lines at gates. It also has started a special business flyer program with higher ticket prices for in-flight extras.

Unlike most of its rivals, Southwest has been able to weather the high fuel prices because of its aggressive fuel hedging program in recent years. But as older contracts run out, the carrier will be more susceptible to current market prices for jet fuel.

For the current quarter, Southwest estimated fuel costs of about $2 a gallon, up from $1.72 per gallon in the fourth quarter.

Delta said Wednesday that for the three months ending Dec. 31, it lost $70 million, or 18 cents a share, compared with a loss of $1.98 billion for the same period a year earlier. It did not provide a per share figure for the prior year, when it was in bankruptcy.

Excluding reorganization items, Delta said it lost $105 million in the latest quarter.

Analysts surveyed by Thomson Financial expected a Delta loss of 18 cents a share. Fourth-quarter revenue rose 10 percent to $4.68 billion, compared with $4.25 billion a year earlier.

Delta spent $1.36 billion on aircraft fuel and related taxes in the quarter, compared with $1.06 billion a year earlier.

Delta did not update investors on the status of talks between it and Northwest and United. Delta has said its board is considering strategic options, including a possible consolidation transaction.

Delta Chief Executive Richard Anderson told analysts the company's strategic review continues.

Delta shares rose $1.13, or 7.6 percent, to $15.98 Wednesday. Southwest shares rose 78 cents, or 6.5 percent, to $12.76.

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