UPDATE 2-ANA lifts profit despite industry headwinds

(Recasts with details, analyst comments)

By Aiko Hayashi

TOKYO, July 31 (Reuters) - All Nippon Airways Co Ltd (ANA) (9202.T), Japan's second-largest airline, reported a 10 percent rise in quarterly operating profit on an uptick in international routes and as hedging cushioned the impact of high oil prices.

Airline operators around the globe are struggling to stay profitable with the price of oil up some 60 percent over the past year. Many have shed jobs and are scrapping routes, while the weakest face the threat of bankruptcy.

ANA, which enjoys a virtual duopoly on the Japanese market with Japan Airlines 9205.T, said it lifted profit in the latest quarter on healthy demand for U.S. and European routes and by hedging against the oil spike.

ANA stuck to its forecast for group operating profit to fall 5 percent in the full year to March to 80 billion yen ($740 million), but analysts warned it may be forced to cut that later this year if oil keeps rising and the global economy continues to slow.

"The situation surrounding the airline industry is outrageous. It's not as if we are completely OK, and we must do our best to hang in there," Eiji Kanazawa, senior vice president at ANA, told Reuters on the sidelines of a news conference.

For the three months ended June 30, ANA booked an operating income of 14.6 billion yen ($135.3 million), up from 13.2 billion yen a year earlier. Sales fell 1.2 percent to 345.5 billion yen, dragged down by a drop-off in demand for flights within Japan.

ANA expects fuel costs to rise 15 percent this year to 307 billion yen. It has hedged 90 percent of its fuel needs for the current business year ending March 2009 at $125 a barrel in Dubai Crude Oil and $160 in Singapore Kerosene, Kanazawa said.

Nomura Securities analyst Makoto Murayama said ANA is still vulnerable because it has not hedged through the fourth quarter, and could revise down its full year outlook when it announces second quarter results.

"Although ANA has hedged about 90 percent so far, the fourth quarter is an open page. If fuel prices keep going up, costs will increase more than expected, coupled with the fact that demand for air travel is unlikely to rise," he said.

The world's airlines stand to lose more than $6 billion this year if fuel costs remain at about $135 a barrel, according to an estimate by the International Air Transport Association, and many are cutting routes and staff to stay afloat.

Australia's top airline Qantas Airways Ltd (QAN.AX) has recently said it would cut 4 percent of its workforce and scrap a growth plan. [ID:nSYD59581]. AMR Corp AMR.N, parent of American Airlines, and Delta Air Lines Inc (DAL.N) have both said they would trim capacity and slash headcount.

ANA spokesman Kazuo Yoshioka said it was considering cutting unprofitable routes or reducing the number of flights, but did not confirm media reports saying it would eliminate domestic and international routes including ones to Taipei and Guam.

ANA and JAL are not hurting as badly as their overseas rivals because the Japanese market does not have the strong low-cost carriers that help drive down prices in markets like the United States.

"U.S. airlines face price competition with rivals with cheaper labour costs on international flights and also suffer financially on domestic flights because low-cost carriers eat into their market share," said Nomura's Murayama.

Japan Airlines is set to report quarterly results on Aug. 7. (Editing by David Cowell)