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High Oil Prices Hit Airlines Hard - 2004-08-20

World airlines are being hammered financially by the sharp 50 percent rise in oil prices this year. The financial squeeze is especially severe at two U.S. based airlines, United and US Airways.

Standard and Poor's, the credit rating agency, Friday downgraded US Airways stock for the third time this year. Based in suburban Washington, US Airways is again seeking significant pay concessions from its employees in order to avoid a second bankruptcy filing. The company emerged from bankruptcy just over a year ago. It is asking its pilots to accept a further 17 percent cut in pay as part of a move to conserve cash.

Like Chicago based United, US Airways says it doesn't have enough cash to meet promised contributions into employee pension plans. United is 500 million dollars behind in its contributions while US Airways faces a 133 million payment next month. United, by some measures the world's biggest airline, is operating under court supervised bankruptcy protection.

After labor the biggest cost for airlines is jet fuel and those prices have increased more than 50 percent this year. Jet fuel prices are up 70 percent in the past 12 months.

Energy analyst Jacques Rousseau at Friedman, Billings, Ramsey in Virginia says even though oil prices Friday retreated from the record high of nearly $50 a barrel they are likely to remain in the $40 range for a long time. He expects some short-term drop in prices in September.

"I think so. When you take a look at supply and demand fundamentals, it's not as if we're short a lot of product. It's that we have tremendous demand," he said to Bloomberg television.

Airlines in Asia have begun posting another fuel surcharge on ticket prices, a move that is likely to spread.

Here in North America the airlines financial plight is being compounded by fare cuts. Major airlines have responded to competition from newer, lower cost companies by cutting fares on most routes. Airline traffic has been heavy during the northern hemisphere summer, where traffic typically falls off in the September to November period.