The American airline industry lost $1.5 billion (£760 million) in the first three months of the year and fears are growing that European carriers will be the next to feel the pain.

High oil prices have caused enormous losses among airlines in the United States, forcing them to seek bankruptcy protection, cut capacity and look for mergers.

The City expects European airlines to experience the same problem as high oil prices drive up operating costs. British Airways’s share price has more than halved since this time last year and analysts expect it to report a second profit warning within months.

Andrew Fitchie, aviation analyst at Collins Stewart, said: “It’s going to be very bad indeed.”

In the past week the US airlines have been reporting their first-quarter results and only Southwest, the pioneer of the low-cost model, has achieved a profit – $34 million, down from $96 million in the same period last year.

United Airlines lost $537 million, American lost $328 million, Delta lost $274 million, Northwest lost $191 million, Continental lost $80 million and JetBlue lost $8 million. Frontier, ATA, Aloha and Skybus have all been grounded by high costs while in Europe, Oasis has gone bust and Silverjet is looking for a buyer.

These results come from a quarter when oil prices were in the $100 to $110 per barrel range, but oil is now trading at $120, and with no indication that fuel costs will fall soon, many airlines are preparing for the worst.

Douglas Steenland, the chief executive of Northwest, admitted: “We are in uncharted waters.”

The US carriers have been hit first by high oil prices because many have only just emerged from Chapter 11 bankruptcy protection after the collapse after the terrorism attacks of September 11, 2001. This meant that they were unable to invest in new aircraft and are flying aeroplanes that are decades old and use 25 per cent to 40 per cent more fuel than current ones.

However, European airlines are also feeling the effect of high fuel costs and the situation is about to get worse as much of their oil hedging ends in the next two months. Carriers that are paying about $80 for half their fuel requirements will soon pay the full market rate and analysts expect that this could trigger a crisis. Airlines such as British Airways and Virgin Atlantic have been unwilling to increase airfares and risk being uncompetitive, so they have instead added “fuel surcharges” to tickets. BA’s surcharge for its longest flights has now reached £58 each way.

The budget carriers have found another way to introduce stealth increases to airfares by adding ancillary charges for services such as checking baggage or airport check-in.

However, both tactics have a natural limit and airlines will have to consider other strategies to deal with rising costs.

The most likely outcome is that airlines will reduce capacity and shut down routes that are not operating with near-full planes, while other carriers will seek mergers in the hope of finding big cost reductions. Delta has decided to pursue both of these strategies and will cut the number of services it offers by 11 per cent this year, while also merging with Northwest in a deal that will create the world’s largest carrier by passenger numbers. United is rumoured to have made an approach to Continental and American is also thought to be considering merger opportunities.

Air France-KLM, Lufthansa and BA are expected to drive consolidation in Europe, creating mega carriers capable of withstanding a long period of high costs.

Doug McVitie, managing director of Arran Aerospace, an aviation consultancy, said: “The legacy of rising oil prices may turn out to be an aviation industry that is dominated by only a handful of super-sized airlines.”

BA margins hit

The City expects British Airways to announce a further profits warning this year as rising fuel bills cut its margins potentially to zero. Willie Walsh, the chief executive, said last month that BA's fuel bill would rise by 20 per cent to £2.5 billion this year and this forced him to scrap a promise to reach profit margins of 10 per cent. The revised profit margin is 7 per cent, which translates into a £273 million profit reduction. However, aviation analysts have been downgrading the stock more severely as they expect fuel to cost even more and the company's share price has halved since this time last year. Exane BNP Paribas, the broker, has predicted that BA's margin will be only 4 per cent, reducing profits by a further £250 million. Both Collins Stewart and Morgan Stanley, the investment banks, have halved their earnings per share estimate to 20p.

Fuel costs up and up

The fuel bill for flying from London to New York has quadrupled in the past eight years because of rising oil prices. A Boeing 767 or Airbus A330 will burn 12,800 gallons of jet fuel during the 3,180 nautical mile journey from London's Heathrow to New York. On return, the average is 10,800 gallons due to tailwinds. In 2000, the cost of jet fuel was 87 cents per gallon, which would cost $20,532 for a return journey ($11,136 alone for the outward trip). The price of jet fuel has risen even faster than oil prices due to a shortage in refining capacity and is now $3.44 per gallon. The outward leg of a transatlantic flight now costs $44,000 and $81,152 for a return journey - a four-fold increase. Airlines have put up fuel surcharges, but economy airfares have stayed static due to the intense competition.

No room to cut

The low-cost model that fuelled the growth of Ryanair and easyJet is under threat from rising fuel prices. High fuel costs and the economic slowdown prompted Michael O'Leary, chief executive of Ryanair, to say profits could fall by 50 per cent this year, but analysts fear that the situation could get worse. No-frills carriers have met rising oil prices by cutting other costs and by introducing new charges, such as bag-checking fees. However, fuel has risen so fast that it now accounts for half of an airline's total costs, which leaves the budget carriers little room to keep total costs down. Also, both Ryanair and easyJet are taking delivery of new aircraft. Analysts see the potential for a perfect storm of budget carriers offering more seats that cost more to operate but with fewer passengers to buy them. Then even established names could go bust.

Flying on fumes

Continental is operating smaller aircraft across the Atlantic in a strategy to cut costs, but last year 96 of its planes ran low on fuel as they approached New York. Continental now uses 180-seat Boeing 757s rather than 250-seat 767s on some flights from London to New York and British Airways is planning to do the same on its new services from Amsterdam and Paris to the US. These smaller aircraft burn less fuel and are easier to fill with passengers. The range of the 757 is 3,900 nautical miles, enough to cross the Atlantic but not to take into account the strong headwinds that blow from west to east. Last year there were 96 incidents when Continental 757s ran low on fuel having made the Atlantic crossing. This strategy has been criticised by aviation safety experts but the airline insists that the flights were safe as they still had a fuel reserve onboard.