In February, with oil prices hovering at just above $90 a barrel, JetBlue Airways announced plans to start four daily flights from the Northeast to Los Angeles. In a matter of weeks, crude prices shot up 30 percent, and in a quick reversal, JetBlue was forced to abandon its plans.

"It cost us $9,600 in fuel to fly from the L.A. area to the Northeast when we announced those flights. Two months later that went up to $15,000," says JetBlue spokesman Bryan Baldwin. "Those are huge cost increases."

The rise in energy prices has been unwelcome in many industries-automakers and retailers have reported softer sales as consumers spend more at the pump. But fuel accounts for a huge portion of airlines' cost structures. And the swiftness of the recent surge in oil prices left them particularly vulnerable as a result.

Through the 1990s, with oil prices at $20 per barrel, fuel expenses made up between 10 and 20 percent of airlines' operating costs. As of the first quarter, with oil prices at over $100 per barrel, most airlines reported fuel costs of between 30 and 40 percent of total expenses—exceeding the amount spent on labor.

So what can an industry projected to lose more than $7 billion this year—about the combined market capitalization of the six legacy carriers—do to survive?

"One of the puzzles of the industry is why haven't airlines been able to pass on higher costs to passengers," says Nancy Rose, an M.I.T. economist who has studied airlines.

While airlines have announced plans to cut unprofitable flights and increased or introduced ancillary charges, they have only recently begun to raise ticket prices.

Competition from low-cost carriers and bankruptcy protection for legacy airlines may be the culprit here, says Rose's colleague Peter Belobaba, who runs M.I.T.'s Global Airline Industry Program. Legacy carriers were able to compete with thriftier airlines in recent years thanks to bankruptcy protection, which helped Delta and others slim down and pare debts.

But this left the marketplace "terribly spoiled over the past five years by what are, by any measure, unreasonably low airfares," Belobaba says.

Delta

Northwest

 
Besides merging, airlines also need to cut down on capacity and dump less fuel-efficient planes to keep energy expenditures in check, experts say. Today, United Airlines said it would remove 100 of its least fuel-efficient planes, the Boeing 737’s, and cut up to 1,000 jobs. By the fourth quarter, United’s capacity will be reduced by 14 percent from the previous year. The move comes after merger talks between United and U.S. Airways were suspended last week.

American Airlines recently announced that it would fly 12 percent fewer seats in the fourth quarter. And some destinations will feel the cutbacks. Traffic at Pittsburgh airports, for example, has declined 25 percent as of February compared with a year ago.

That may sound like a lot, but it's close to the level analysts believe airlines need to pare unprofitable flights back by in order to stop the bleeding. Flight delays can also eat away at revenues. In 2007, delayed flights cost airlines an extra $19 billion in extra fuel, crew, and maintenance costs, according to a report by the Joint Economic Committee.

One more option for airlines is to hedge against rising fuel prices.Southwest Airlines, the only major airline to actively protect itself against higher oil costs, has been able to increase its cash levels to more than $3 billion thanks to its hedges. In addition, the Dallas-based low-cost airline has hedged 70 percent of its 2008 fuel consumption at about $50 per barrel.

Buying protection still makes sense if airlines believe crude will go even higher, says Robert Mann, an industry consultant. The problem for airlines, however, is that they're unprofitable at current prices, so unless costs are reduced or revenues raised, hedges will diminish the pain but not heal it.

Southwest's cash hoard makes it the best-positioned airline to survive the worst of the oil crunch, estimates Morningstar.  Indeed, some have even suggested that Southwest may be the only American airline to survive the current fuel crunch.

Still, a combined Delta and Northwest are also on the relatively healthy list, as is Continental. At the other end of the spectrum, the airlines most likely to need bankruptcy protection are American Airlines, JetBlue, and US Airways.

But not everyone thinks the industry will get crushed. Roger King, an airlines analyst with CreditSights, points to the relative resistance of drivers to higher gas prices as a sign that demand may not wane as much as feared when ticket prices do head north. Average gasoline prices have jumped 70 percent since January 2007, and although consumers are cutting back on car usage, the number of miles driven is still up 7 percent.

King estimates that at $117 per barrel, airlines would have to increase fares by only 14 percent on average over 2007 levels in order to break even.

"That doesn't seem like a lot," he says. "I think the airlines are just an industry that everyone likes to bitch about."