Southeast Asia's leading discount carrier AirAsia warned that surging oil prices which hit US$70 a barrel Monday could force a shake-out in the aviation industry.

"I think high oil prices will sort out the efficient and non-efficient players in the airline industry," said chief executive officer Tony Fernandes.

"Players who do not operate on a cost efficiency model will have to restructure or just go out of business," he said.

Asia's low-cost airline industry is seen as particularly ripe for a round of mergers and failures, due to high costs, government restrictions, and intense competition created by a host of start-up operations.

However, AirAsia's chief financial officer Raja Mohmamad Azmi Raja Razali said the carrier was cushioned from the impact of high oil prices by its twin policy of hedging and insurance.

"The impact on us is less. Besides a hedging policy we have an insurance cap on oil prices at 70 dollars a barrel," he said.

Azmi predicted oil prices would continue to rise, adding that "AirAsia will study if there is a need to review its fuel surcharges on passengers."

In July it imposed a fuel surcharge on its flights for the first time as part of efforts to combat spiraling fuel costs.

New strategies

Fernandes has also said that the airline is planning other strategies to compensate for rising costs, including boosting the load factor from the current 70 percent up to 80-90 percent.

AirAsia last Friday posted inaugural annual net profits of RM111.63 million, 30.2 percent lower than forecast in its initial public offering last year, due to higher fuel prices and an aircraft shortage.

Jet fuel represents 43 percent of AirAsia's total operating costs.

Malaysia-based AirAsia was the first regional carrier to offer discount fares, and has spawned a host of imitators. It has since spread its wings with joint-venture operations in Thailand and Indonesia.

It operates a fleet of 30 Boeing 737-300s and flies to 52 destinations in Malaysia and six internationally, and has announced plans to establish new routes to Brunei, Cambodia and Vietnam in the near future.

In the financial year to June, AirAsia carried 4.4 million passengers, 55 percent more than a year earlier, and it plans to boost passenger numbers to about 8.0 million next year.

Oil prices hit new record highs Monday, crossing 70 dollars a barrel in Asian trade as powerful Hurricane Katrina threatened the crude-producing Gulf of Mexico region in the United States.