Airline execs worry over oil spike, see mergers

By Kyle Peterson

CHICAGO (Reuters) - Prospects of $100-a-barrel oil sent shares of U.S. airlines tumbling on Wednesday, renewing talk in the industry of mergers and ticket price hikes as a way to hold onto profit margins.

The oil spike comes as a softening economy begins to threaten an industry only just recovering from years of cutthroat competition and a series of bankruptcies.

"I'm not certain that where we are today is a business that can handle $100-a-barrel oil," US Airways Group Chief Executive Doug Parker said at a Wall Street investor conference on Wednesday.

"We've been through a painful restructuring since 2001, but we're still not fixed," said Parker, whose remarks were broadcast on the Web.

The chief financial officer of AMR Corp's American Airlines stressed that higher ticket prices were necessary to compensate for soaring oil.

"We've got to find a way to pass on fuel expenses to our customers," CFO Tom Horton said at the same conference. "We're going to need to keep driving costs down in order to compensate for the fuel-revenue disconnect."

The price of NYMEX crude oil futures -- directly related to the price of jet fuel -- notched a record high above $98.50 on Wednesday.

The Amex airline index fell 3 percent to its lowest level since August 16. Shares of Delta Air Lines were hit hardest, falling 6.1 percent to $17.38.

If economic weakness crimps demand, airlines must consider mergers as a way to pull capacity from their systems, said Parker, the most visible advocate for industry consolidation.

DOMINOES FALLING

Fuel rivals labor costs as airlines' top expense. Since 2006, carriers have offset that cost by reducing the number of seats for sale and raising fares.

Parker, who engineered the 2005 merger of US Airways and America West, failed this year in his attempt to merge US Airways with Delta Air Lines.

Delta rejected the US Airways bid, saying it had more long-term value as a stand-alone airline. But as oil prices continue to rise and the U.S. economy shows signs of slowing, airline leaders -- including those at Delta, its new CEO said last month -- have shown renewed interest in consolidation.

Also speaking at the conference, Continental Airlines Chief Financial Officer Jeff Misner said Continental would not likely be the one that started the merger wave.

"Continental will not be left behind," said Misner. "We just don't necessarily have the ability to start the dominoes falling."