Airlines expect cut in profits

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. 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.

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 on 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.”

Despite the expected decline in U.S. carriers’ profitability, a 2008 profit would mark the industry’s third straight, which has not happened since 1998-2000 and would follow a five-year combined loss of $35 billion, Heimlich said. His profit forecast includes domestic passenger and cargo airlines, while excluding bankruptcy and other charges.

Fuel costs are now the single biggest cost for airlines, followed by labor. Jet fuel accounted for more than a quarter of U.S. airlines’ operating expenses in the second quarter of 2007, and are expected to represent about 28 percent of global expenses in 2007, according to industry officials.