It should have been a great quarter for Alaska Air Group.

Just look at the figures at its principal subsidiary, Alaska Airlines:

Passenger traffic: Up 11.3 percent
Percentage of seats filled: Up 3 percentage points.
Operating revenues per seat/mile: Up 3 percent.
Operating costs per seat minus fuel: Down 3.4 percent.

But the SeaTac-based airline holding company, parent of Alaska Airlines and Horizon Air, today announced a first quarter net loss of $35.9 million.

The boogey man in this whole picture: Steeply rising fuel costs.

Even with the second-best fuel hedging in the domestic airline industry, Alaska Airlines' fuel costs rose from an average of $1.87 a gallon in the first quarter of 2007 to $2.72 a gallon in the first quarter of 2008. That represented $76.1 million in extra cost for the airline. The story was similar at Alaska's regional partner, Horizon Air.

"Although Alaska Air Group is in a good position relative to the rest of the industry, high fuel prices are eroding our profits and revenues are not increasing fast enough to offset them," said Bill Ayer, the airlines' chairman and chief executive officer.

To counter the rising fuel costs, the airline group announced changes designed to cut fuel consumption, boost revenues and trim expenses.

It will:

*Sell off its fleet of Horizon Air Bombardier 70-seat CRJ jets within the next two years and replace them with more fuel efficient Bombardier Q400 turboprops. The airline is already scheduled to replace its smaller Q200 turboprops with Q400s. The resulting fleet, which may be smaller than the present 65-plane fleet, will consist of a single aircraft type, the Q400, reducing maintenance and training costs.

CRJ700

Q400

[More:]

* Implement a range of increased fees to raise more revenues including joining other airlines in charging $25 for a second checked bag beginning this summer. Other fee increases include: $15 for booking through a sales agent up from $10; $50 for overweight baggage, up from $25; $100 for transporting pets in the cabin, up from $75; $75 for unaccompanied minors on non-stop flights, up from $30. These fees except the second bag fee will be effective May 21.

* The company will reduce frequency in underperforming markets and redeploy aircraft to potentially more profitable routes. Alaska, for instance, has announced it will halt flights between Orange County and Oakland and between San Diego and San Francisco. It is reducing Seattle-Long Beach and Los Angeles-Eugene, San Diego-Boise and San Diego-Spokane service. Aircraft have been redeployed into new Seattle-Maui and Seattle-California service.

* The airlines have embarked on initiatives to save a million gallons of fuel monthly. Those measures include more direct flight routings, single-engine taxiing and using more ground power instead of running aircraft auxiliary power units.

Alaska's dilemma isn't unique in the industry. All major airlines with the exception of Southwest, which announced dramatically reduced profits, were in the red this quarter.

Here are some of their results:

Delta $274 million loss
United $537 million loss
Air Tran $34.8 million loss
JetBlue $8 million loss
Northwest $191 million loss
American $328 million loss
Continental $80 million loss
Southwest $34 million profit

"The outlook for the industry is definitely gloomy," said Dave Swierenga, president of consulting firm AeroEcon in Round Rock, Texas told the Salt Lake City Tribune. "The second and third quarters hopefully won't be as bad as the first and the fourth this year."

Airlines must raise rates by at least 15 percent to offset fuel increases, Delta's CEO told analysts this week.

The industry has implemented a series of ticket price increases this year but not enough to offset fuel prices. So far traffic has not marketedly decreased. But airlines fear that if they raise prices too high and consumers and business people cut flying because of their own economic crises, traffic will begin to fall.

Ray Neidl, airline analyst for Calyon Securities, commenting about the ability of airlines thus far to raise prices without affecting demand, noted, " This is strange, and we expect to see demand to begin to soften at some point. We believe that it proves our theory that airlines have been underpricing tickets and that if you give something away, people will come."