U.S. airlines may set record for fuel costs in Q1

* Fuel costs up about 35 pct to $11.8 bln - ATA

* Shares had been under pressure but up as oil lower

By John Crawley and Kyle Peterson

WASHINGTON/CHICAGO, April 12 (Reuters) - U.S. airlines may set a record for fuel costs when they report quarterly results in coming weeks, paying about $3 billion more this year so far and muddying what had been a strengthening recovery.

Estimates calculated by the Air Transport Association show that fuel as a percentage of operating expenses could hit between 35 and 40 percent, compared with the high-water mark of 36 percent set in the third quarter of 2008.

"We've got to be awfully close to that," John Heimlich, the trade group's chief economist, told Reuters in an interview. "That wouldn't be established, though, until we see them report out."

The ATA projects the 2011 first-quarter fuel bill will be about $3 billion higher than for the year-ago period -- a rise from $8.8 billion to $11.8 billion, or about 35 percent.

Analyst Helane Becker with Dahlman Rose & Co downgraded the sector on Monday, saying airline management could not "catch a break" between bad winter weather and soaring fuel prices.

"In a volatile environment, even with airlines moving prices up almost weekly, (airlines) cannot keep up with the recent moves in Brent (crude)," Becker wrote in a note to clients of the London benchmark oil price that hit a 32-month high on Friday.

Moreover, Becker said a jet fuel price over $3.41 per gallon "does not bode well" for margins for the second quarter, and most likely the third. Airline shares, she said, are overvalued.

The ARCA Airline Index .XAL lost nearly 20 percent of its value in the January-March period before rallying on Tuesday as oil prices retreated.

While fuel may be flexing its muscle and pressuring results, the overall price spike does not pose the type of fundamental threat it did in 2008, when some big airlines feared insolvency as the economy soured.

"It's completely different from the last time," US Airways Group Inc (LCC.N) Chief Executive Doug Parker told Reuters in an interview.

"The last time what happened is oil prices went up and we never were able to pass it along." Parker said healthy demand in a stronger economy has enabled carriers to pull off an initial round of fare increases to boost revenue and offset part of the heavier fuel bill.

Heimlich called it a paradigm shift topped by recent mergers and downsizing that have enabled carriers to better target premium-paying business customers. Heimlich also said executives are getting better at managing their balance sheets, keeping more cash on hand and being mindful of the potential for price volatility.

Speaking at an investor conference in March, Beverly Goulet, AMR Corp's AMR.N vice president of corporate development, said rising fuel costs had forced AMR's American Airlines unit to curb capacity by 1 percentage point for 2011.

AMR had planned to raise mainline capacity by 3.5 percent.

United Continental Holdings Inc (UAL.N) said last month it would reduce consolidated capacity from its previous 2011 projections by 1 percent starting with its May schedule and by 4 percent starting with its September schedule.

In addition to raising revenues, some carriers have also reduced or eliminated less efficient aircraft. For instance, Delta Air Lines Inc (DAL.N) is accelerating retirement of the DC-9s it inherited from Northwest Airlines in their merger. United Continental said it also may remove some less fuel-efficient aircraft.

In addition, carriers have put down some of their older Boeing Co (BA.N) 737s and even some 747 jumbo jets, as well as some 50-seat regional jets on short-haul domestic routes, which have given way to more efficient turbo-props. (Editing by Gerald E. McCormick)