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Airline profits to suffer as fuel costs rise

Rising airline fuel costs may wipe out the profits of whole sectors of the industry this year despite the oil price falling from a recent high of $100.

Last week the price per barrel fell to below $90, its lowest since August. However, the increased cost of hedging fuel – buying supplies in advance to protect against a future price rise – will mean fuel bills increase anyway, with airlines paying more to hedge now than a year ago.

US Airways chief executive Doug Parker has warned that fuel costs would swallow the entire profits of US airlines, which returned to collective profit last year for the first time since 2001.

Parker said: “What we are spending on oil is more than enough to push everyone to a pretty big loss.”

That is leading to intense pressure for consolidation. The board of Delta Air Lines has given the go-ahead for merger talks with rivals – with a choice between United Airlines and Northwest Airlines likely.

Northwest chief executive Doug Steenland wrote to staff last week warning: “Doing nothing could be our worst alternative. We could be left with no options.”

Continental Airlines also signalled its determination to be included in consolidation that would see six of the biggest US carriers reduced to three – although it reported an unexpected profit of $71 million for the last quarter of 2007.

However, the process could be fraught. Leaders of the Delta pilots’ union are already preparing strike committees, having warned: “Any attempt at consolidation will fail without the involvement and support of pilots.”

British Airways’ code-share partner American Airlines will cut its domestic schedule after previously announcing expansion.

The carrier reported its first quarterly loss for two years and Gerard Arpey, chief executive of American parent company AMR, said: “Our fuel problem shows no sign of abating, the economy may be sliding into recession and we face intense competition.”

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