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U.S. airlines may post record profits next year, analyst says

Airline stocks plunged Wednesday as oil prices inched up and United Airlines issued worse-than-expected outlook for the third quarter.

Still, a silver lining shone among the gloom – a prediction from one analyst that the industry could produce record operating profits next year thanks to lower fuel prices, less capacity and new fees from items like checked baggage.

“Could 2009 be a record profit?” asked Jamie Baker, an airline analyst with J.P. Morgan, in a report.

Baker noted that it is “increasingly possible” that jet fuel prices may be lower next year than in 2008. Combined with a 6 percent drop in airline capacity and additional revenue from new fees, such as checked baggage charges, the industry could potentially have a strong year, he said.

“While far from assured, the potential for record 2009 profits is likely to strike many by surprise,” he said. “We figured we might as well be the first to point out the math.”

Still, investors dumped airline shares as crude oil prices reversed their slow decline. Oil was trading at about $95 per barrel mid-day Wednesday, up 4 percent.

And Wall Street was disappointed in a third-quarter unit revenue forecast from United. The airline predicted an increase of up to 6 percent for every mile flown by each seat, which Baker said suggested a quarterly loss of about $2.30 per share.

That’s significantly lower than Wall Street’s current estimate of $1.08.

“Obviously a bit of a disappointment,” he said.

United also said it would record a $225 million charge related to the value of its fuel hedges, because of the recent drop in jet fuel and crude oil prices. Hedging contracts lock in the price of some fuel purchases in advance.

Shares of Fort Worth-based AMR Corp., parent company of American Airlines (ticker: AMR), were down $2.01 per share to $10.99 at mid-day Wednesday, a drop of more than 15 percent.

United (ticker: UAUA) was down $2.05 at $11.97, about 15 percent; and Delta Air Lines (ticker: DAL) had slipped 97 cents to $8.97, a decline of about 10 percent.