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Analysis: Airlines stand by fare hike despite pressure

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By Kyle Peterson and Karen Jacobs

CHICAGO/ATLANTA (Reuters) - U.S. airlines are not likely to bow to pressure from the White House and elsewhere to rollback a fare increase facilitated by a Washington political standoff that could net the industry more than $1 billion in unexpected third quarter revenue.

Analysts and carriers have said the industry justifiably capitalized on quick profits when, because of congressional inaction on temporary aviation funding legislation last month, they stopped collecting certain ticket taxes and raised fares by a like amount.

"Airlines are not making tons of money. They're barely surviving," said Helane Becker, an industry analyst with Dahlman Rose & Company.

Major airlines lost an estimated $440 million for the first six months of 2011 due mainly to higher fuel costs, industry figures show.

By comparison, the government has lost an estimated $360 million in ticket tax revenue due to the 12-day impasse that has also prompted a shutdown of airport construction projects overseen by the Federal Aviation Administration (FAA), congressional and transportation officials said.

Congress has been fighting over unrelated rural air subsidies that have delayed passage of the stop-gap FAA funding bill that requires collection of a 7.5 percent passenger ticket tax. FAA air traffic operations are unaffected.

Analyst Jamie Baker of JP Morgan said in a note to clients that airlines could net up to $1.2 billion from the start of the shutdown on July 23 to early September -- when Congress is scheduled to return from a vacation begun this week -- if the impasse is not resolved before then.

Moreover, analyst William Greene of Morgan Stanley said the tax holiday is a positive catalyst, noting unit revenue "will be favorably impacted" for months after the matter is resolved.

The development enhances liquidity, he said in a note which also expressed a view that recent consensus sell-side share downgrades are a "contrarian indicator that only enhances the attractiveness of shares" when benefits of the tax holiday and lower fuel prices are considered.

Transportation Secretary Ray LaHood expressed opposition to fare increases in conversations with airline executives. And on Wednesday, President Barack Obama joined in, decrying the total tax revenue that could be lost to the federal Treasury.

"That would be a billion dollars at a time when we're worrying about how we pay for everything from education to Head Start," Obama said prior to a Cabinet meeting. "And we don't anticipate it's going to be easy to get that money back. Even though the airlines are collecting it, they're keeping it."

Delta Air Lines <DAL.N>, United Airlines <UAL.N>, US Airways <LCC.N> and Southwest Airlines <LUV.N> have said little about the unusual fare increase that is not without precedent.

But the industry is unapologetic about finding new revenue at a time when losses mount and there are concerns about the impact of a weak economy on demand.

"Airlines are merely seeking to function as responsible businesses that are able to cover their costs, which airlines are not doing today," the Air Transport Association, the chief lobbying group for major carriers in Washington.

"Airlines like any U.S. business have a fiduciary responsibility to their shareholders, customers and employees, not only to cover their costs, but to earn a meaningful profit," the ATA said.

Moreover, analysts, industry and fare experts note passengers are not paying more than they were two weeks ago and believe the windfall will run its course sooner rather than later.

Rick Seaney, chief executive of FareCompare.com, said airlines might have no choice but to roll back prices to entice consumers heading into the slower fall season if the congressional stalemate is resolved and the tax holiday ends.

Some airlines say they will help passengers try to collect limited IRS refunds related only to tickets purchased before the shutdown for travel during the shutdown.

(Additional reporting by John Crawley; editing by Andre Grenon)