DAVID KOENIG

Associated Press

This year brought more evidence how the U.S. airline industry has been turned upside down, with the once-mighty hub-and-spoke carriers continuing to lose money while low-cost operators remain profitable and drive more change.

The three major Texas-based carriers reflected the trend perfectly.

American Airlines, the nation`s largest carrier, and Continental Airlines both hoped to return to profitability in 2004, only to see the high cost of jet fuel result in another money-losing year. American figures to spend $1.2 billion more on fuel in 2004 than the previous year.

While fuel is adding to airline costs, constant fare sales are pinching carriers` revenue.

``We never know who will launch the next fare war, and how much`` they will discount, said Dan Garton, American`s executive vice president of marketing. He complained that carriers, many in dire financial straits, continue to add flights, further depressing prices.

Analysts expect all the old-line, so-called legacy carriers such as American, a unit of Fort Worth-based AMR Corp., and Houston-based Continental to lose money again next year. Against that backdrop, they continue to press employees for wage and benefit cuts - Continental becoming the most recent to demand labor concessions.

At the other end of the tarmac, Southwest Airlines Co. goes about its business of making a profit - its hot streak now extends to over a decade.

Dallas-based Southwest represents the shift in power in the airline industry from the big carriers with vast networks of connecting flights to upstart low-cost carriers.

For 30 years, Southwest was an underdog known for dressing stewardesses in hot pants and pioneering low fares. The hot pants are long gone, and stewardesses are now flight attendants, but the low fares have boosted Southwest far above the turbulence rocking most rivals.

Southwest`s market capitalization is nearly four times more than that of AMR, Continental and Delta Air Lines Inc. combined, and it is the only U.S. carrier whose debt is still rated investment grade by Moody`s Investors Service.

Southwest has grown slowly and carefully over the years, adding new service to a couple cities a year. In December, Southwest made a dramatic move by increasing its stronghold at Chicago`s Midway Airport. Its bid of $117 million won assets of bankrupt ATA Airlines, including six gates at the airport.

Mike Boyd, an airline consultant based in Colorado, said Southwest`s move was shrewd because it will prevent another carrier from building a hub at Midway, where ATA was the second-biggest player.

``With the collapse of ATA, ... (Southwest) had to stop a real competitive threat from getting there,`` Boyd said.

Richard Bittenbender, an airline analyst at Moody`s, said low-cost carriers like Southwest and JetBlue Airways Corp. are affecting prices on about 90 percent of U.S. routes.

``If they don`t dominate`` the industry, ``they`re certainly a meaningful party at the table,`` he said.

Even Southwest hit some rough patches in 2004, however. Chief executive James F. Parker resigned suddenly after becoming embroiled in tough contract negotiations with flight attendants. In stepped Gary Kelly, 49, the company`s longtime chief financial officer and architect of a plan that has saved Southwest millions on fuel in recent years.

Kelly sounded a stay-the-course plan for the airline, and investors barely took note of the change at the top.

Continental will have a new chief executive in January, when president Larry Kellner is scheduled to succeed retiring Gordon Bethune. American`s Gerard Arpey, with less than two years at the helm, will become the dean of Texas airline CEOs.

Kellner and Arpey both face huge challenges to reduce their companies` costs, analysts say.

There isn`t much they can do about fuel, rent and interest payments, and they can only wring so much out of insurance, advertising and other costs. That leaves one place to go for cost savings.

``You can`t ignore that largest block of expense, which is people,`` said Bittenbender, the Moody`s analyst.

Last year, American won $1.8 billion in annual savings from employees, who agreed to wage and benefit cuts, but the company has signaled it won`t stop there. Last month, Arpey said the company would make additional layoffs on top of 1,100 pilot and mechanic positions it has already targeted for elimination. The company also plans to cut its U.S. flight schedule by 5 percent early next year.

Meanwhile, American continues to look for new ways to attract passengers and increase revenue. It is testing an in-flight entertainment package including movies and newspapers for $10 to $12. Garton said 30 to 40 customers per flight are buying the package and American hopes to offer it on all long flights by next summer.

After disastrous results in 2001 and 2002, Continental Airlines Inc. cut its loss last year to $38 million, raising hopes that the Houston-based carrier could turn a profit in 2004. Through the first nine months of this year, Continental`s revenue climbed 11 percent, but losses have widened to $157 million.

In December, Continental said it needed $500 million in annual cost savings from employees. It had completed agreements with a handful of work groups for $70 million by last week, and is talking to other labor groups.

Even Southwest has seen its labor costs rise, as pilots, mechanics and flight attendants won long-term contracts that include double-digit pay raises and stock options.

Boyd, the airline consultant, said that`s why Southwest is so eager to expand in Chicago and is lobbying to end restrictions on long-haul flights from its home base of Dallas Love Field.

``Southwest realized months ago that ... they`re going to have a cost problem,`` Boyd said. ``They have to expand to spread out their high labor costs.``

ON THE NET