By Chris Reiter
WASHINGTON (Reuters) - Southwest Airlines Co (LUV.N: Quote, Profile, Research, Stock Buzz), the leading U.S. low-cost carrier, expects soaring fuel costs to lead to higher fares and possibly push rivals into mergers, its chief executive said on Wednesday.
"It feels like fares will need to continue to rise on an annual basis because costs are escalating rapidly," Gary Kelly said at the Reuters Aerospace and Defense Summit in Washington.
Oil prices, which hit record levels in recent weeks, are driving up the cost of jet fuel. Combined with a darkening outlook for the U.S. economy, the U.S. airline industry, which emerged from a five-year slump in 2006, may be heading for another rough patch.
"There is a lot of peril that remains," Kelly said.
The recent run-up in oil "isn't a spike. We're at a new level. The industry hasn't adjusted to it yet. We haven't adjusted to it yet."
Higher fuel costs could help cripple the industry's hard-won turnaround, which has come through deep wage cuts and reduced fleets. But airlines remain vulnerable and may look to merge to survive.
"You will have a recession some time, and the impact on the airline industry will be dramatic," said Kelly. "All of that leads to consolidation, I think."
Southwest, one of the few U.S. carriers to consistently post profits, is adjusting to rising fuel, labor, and airport costs by looking to boost revenue, with new products like its Business Select fares, which come with faster boarding and a cocktail on board. Continued...
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