Cumulative fourth quarter losses at the nation's biggest airlines are expected to exceed $2 billion due to the high price of jet fuel and the industry's inability to raise fares.

While improving economic conditions bolstered travel demand in the last three months of 2004, any benefit for large airlines such as AMR Corp. (AMR) , Delta Air Lines Inc. (DAL) and Continental Airlines Inc. (CAL) was more than offset by the surge in jet fuel prices.

The Air Transport Association (search) estimates that U.S. carriers spent an additional $6 billion for jet fuel in 2004, an almost 40 percent increase over 2003.

Fierce competition from budget carriers such as Southwest Airlines Co. (LUV) and JetBlue Airways Corp. (JBLU) and the growing number of seats available nationwide compounded the problem by pushing already unprofitably low fares down further for most airliners.

For example, in the final week of 2004, average leisure fares were 10 percent lower than the year before, according to Harrell Associates' analysis of the 100 busiest domestic routes. Business fares were down 8 percent.

"Although passenger volumes are back to 2000 levels ... revenues are not," Merrill Lynch airline analyst Michael Linenberg said in a recent report. Linenberg estimated that industrywide operating costs grew by 6.4 percent in the fourth quarter.

The nine largest U.S. carriers will post combined fourth quarter losses of $2.3 billion, Linenberg said, with Southwest being the only one to make money. Southwest is scheduled to report fourth quarter results Wednesday, as are American and Northwest Airlines Corp.

The fourth quarter was also marred by a couple of high-profile holiday-travel operational meltdowns. A computer malfunction forced Comair, a Delta -owned regional carrier, to cancel all its flights on Christmas and staffing shortages at US Airways Group Inc. resulted in a 10,000 bag pile up in Philadelphia.

Some industry observers said the incidents fed the perception, rightly or wrongly, that air travel is getting worse. The Transportation Department's (search) inspector general is conducting investigations into what went wrong.

Last week's decision by Delta to chop the price of fares booked at the last minute — a move that was quickly imitated by American Airlines and followed to a lesser extent by a handful of other carriers — only worsens the industry's financial outlook in the near term, analysts said.

Longer term, though, analysts believe struggling airlines will become more competitive with thriving low-cost carriers because of the airfare restructuring. It was aimed at mollifying business travelers who often have unpredictable travel schedules that require them to book fares at the last minute.

J.P. Morgan airline analyst Jamie Baker said in a report that he expects revenue to suffer at low-cost carriers such as America West Holdings Corp. and AirTran Holdings Inc., which offer travelers willing to make connections cheaper fares than those available from bigger airlines that fly nonstop on similar routes.

"As nonstop fares decline, so too will the economic incentive to change planes," he said.

Similarly, Baker said price-sensitive business and leisure travelers once willing to drive to less convenient airports in order to save money on fares might now think twice about that.

Southwest, which pulls fliers away from Boston and Atlanta by flying out of Manchester, N.H., and Birmingham, Ala., respectively, could see as much as $180 million in business evaporate, Baker said. JetBlue could suffer from the same phenomenon, albeit to a lesser extent.

More than anything else, though, the high cost of jet fuel is expected to once again dominate the industry's woes.

Merrill Lynch's Linenberg estimates that every $1 per barrel change in the price of oil alters the industry's pretax profits by $320 million.

Calyon Securities airline analyst Ray Neidl said he anticipates industrywide losses in 2005 to be about $1.9 billion, a significant improvement from 2004 thanks to intense cuts in labor expenses. Neidl's estimate assumes oil prices average $35 a barrel. On Thursday, crude futures traded near $48 a barrel.