DALLAS — Investors know jet-fuel prices are killing airlines’ profits, but they will soon get an up-close view of the damage when major carriers begin reporting third-quarter earnings.

The period, which includes the busy summer travel season, is traditionally the industry’s most profitable.

But even the strongest U.S. carrier, Southwest Airlines, will find its 54th consecutive quarterly profit dented by oil prices that topped $40 a barrel for most of the period.

After Southwest reports today, the earnings mood will darken next week when the network carriers reveal the wounds from having virtually no hedging against jet fuel prices.

Collectively, the industry will lose $5 billion this year and $2.2 billion in 2005, estimates analyst Michael Linenberg of Merrill Lynch. If oil prices remain above $50 a barrel next year, the loss would jump to $6.5 billion.

“Every $1 change to the price of oil equates to about a $450 million pretax swing to the bottom line,” Linenberg said in a research note.

“And that math does not assume any accompanying decline in revenue, which we think could very well occur as the high price of oil begins to act like a brake on the global economy.”

Southwest is expected to spend $100 million above its original 2004 fuel budget, despite having 80 percent of its needs prepurchased at prices averaging $24 a barrel.

Southwest is expected to post a modest profit of $126 million.

Last-minute adjustments could lower that estimate as Wall Street factors stubbornly high oil prices into airline results. Crude futures hit another record Monday, closing at $53.64, the same price it closed at yesterday.

Wall Street is particularly curious about Southwest’s progress on controlling costs. Southwest Chief Executive Gary Kelly said Oct. 1 that the carrier has its costs “under control,” thanks in part to aggressive growth.

Southwest’s unit costs — what it spends to fly one seat one mile — topped 8 cents in the second quarter due to some one-time charges and fast-rising employee salaries. The carrier wants to keep that closer to 7.5 cents.

But by flying more “units,” the airline can lower its costs. Kelly said the airline could possibly expand faster than its anticipated 10 percent rate in 2005 because other carriers may fold and present Southwest with easy new routes to fill.

As the carrier best protected against high fuel prices, Southwest aims to restart interest in its moribund shares by laying out its ability to move quickly.

“I think we’re basically ready for anything,” Kelly said.

Delta Air Lines, which reports Wednesday, hopes to tell investors about a new deal with its pilots. Several analysts believe that if the Atlanta carrier gets $1 billion in concessions from its pilots, it could avoid filing for bankruptcy protection.

Delta, the nation’s No. 3 carrier, is expected to lose $448 million in the quarter.

“I’m more optimistic than most — I think it’s about 50/50 that they’ll file,” said Ray Neidl, an analyst for Calyon Securities (USA). “They’ve got to get more than the pilot deal.”

American Airlines will also report Wednesday and is expected to lose $224 million despite having the lowest costs of the major network airlines.

Investors want to know how American can lower costs further to compete against low-cost airlines and stay ahead of rivals such as Delta, which has launched a cost-cutting campaign.

The outlook for oil prices and large airlines remains grim. Struggling carriers can’t afford to use cash to hedge in the futures markets, and steadily increasing prices haven’t allowed carriers to lock in attractive prices.

Even if revenue doesn’t decline further, traditional carriers such as American can’t make money with oil prices above $40 a barrel, Neidl said.

Fares may be firming, as two $5-per-flight increases on its cheapest domestic tickets launched by American appear to be holding.

Fare watcher Tom Parsons of BestFares.com expects more fare increases because traditional holdout Northwest Airlines has agreed to the most recent fare actions.

“Now that Northwest has gone along on the two most recent hikes, the floodgates are open for more,” he said.

Copyright © 2004 The Seattle Times Company