Strong de­mand at Amer­i­can Air­lines; Lean times ahead?

Q2 profit falls 15% on fuel and la­bor costs

Kuwait Times - - BUSINESS -

Dou­ble-digit in­creases in fuel and la­bor costs caused sec­ond-quar­ter profit at Amer­i­can Air­lines to fall 15 per­cent de­spite higher rev­enue. The world’s big­gest air­line still beat Wall Street ex­pec­ta­tions, earn­ing $803 mil­lion in the quar­ter, which marks the start of the key sum­mer-va­ca­tion travel sea­son.

Like other air­lines, Amer­i­can is en­joy­ing de­mand that is strong enough to push up av­er­age fares and fees. A key fig­ure that roughly par­al­lels fares jumped 5.7 per­cent in the quar­ter, but Amer­i­can on Fri­day pre­dicted a much more mod­est in­crease - be­tween 0.5 per­cent and 2.5 per­cent - in the same fig­ure dur­ing the Ju­lythrough-Septem­ber pe­riod. An ex­ec­u­tive told an­a­lysts the fourth quar­ter would be bet­ter than the third, al­though he gave no num­bers.

In­vestors, in­creas­ingly wor­ried about air­lines cut­ting prices to hang on to their share of pas­sen­gers, sold off shares Fri­day af­ter­noon. Shares of Amer­i­can Air­lines Group Inc. fell 58 cents, to $49.42. Amer­i­can’s re­sults wrapped up a rocky earn­ings sea­son for the ma­jor US air­lines. It started with a thud when United Air­lines gave a poor rev­enue prog­nos­ti­ca­tion for the third quar­ter and con­tin­ued with a weak third-quar­ter fore­cast on av­er­age fares from South­west Air­lines, which car­ries more US pas­sen­gers than any­one. Along the way, ex­ec­u­tives at sev­eral air­lines spoke about lower fares in mar­kets stretch­ing from New York to Florida to Den­ver.

Price-cut­ting dur­ing the peak sum­mer sea­son is rare, said Cowen and Co. an­a­lyst He­lane Becker. She said it was un­der­stand­able that Amer­i­can would try to calm ner­vous in­vestors by sound­ing up­beat about the fourth quar­ter, but it was too early to tell what might hap­pen given all the talk from other air­lines about dis­count­ing do­mes­tic fares.

Air­lines are look­ing for new ways to raise rev­enue, in­clud­ing cram­ming more peo­ple in their planes. Amer­i­can re­cently backed off a plan to move the last three rows in new Boe­ing 737 jets closer to­gether. It would have brought in more money by mak­ing room for an­other row of roomier, higher-priced seats to­ward the front of each plane.

“We got a lot of push­back from our cus­tomers and most no­tably” from flight at­ten­dants, said CEO Doug Parker. So the air­line yielded - by an inch. In­stead of rows be­ing 29 inches apart - that dis­tance is called “pitch” in the air­line busi­ness - they will be 30 inches apart.

Parker said man­age­ment learned that while the move might have raised rev­enue, it “wasn’t worth it.” Some law­mak­ers re­sponded by propos­ing fed­eral reg­u­la­tions on seat size and legroom. Amer­i­can and other big US air­lines have an am­bi­tious agenda in Wash­ing­ton but so far ap­pear stymied in ef­forts to ad­dress what Amer­i­can, Delta and United claim is un­fair com­pe­ti­tion from three Mid­dle Eastern car­ri­ers, to pri­va­tize the air traf­fic con­trol sys­tem, and to block in­creases in govern­ment fees on air­line tickets. “Let’s face it, there is a lot go­ing on in Wash­ing­ton and a lot of drama,” and it’s not a good en­vi­ron­ment to dis­cuss air­line is­sues, said Stephen John­son, the ex­ec­u­tive vice pres­i­dent who over­sees Amer­i­can’s lob­by­ing ef­forts. He noted that there is op­po­si­tion to Amer­i­can’s is­sues. John­son said that af­ter Congress takes its Au­gust re­cess, “hope­fully we will be able to re­set and fo­cus on other things in Septem­ber and Oc­to­ber and be able to move these is­sues for­ward.” Amer­i­can, based in Fort Worth, Texas, re­ported that sec­ondquar­ter profit fell $147 mil­lion from the same pe­riod last year. Ex­clud­ing one-time items, the com­pany said ad­justed profit was $1.92 per share. That beat the $1.87 per share av­er­age fore­cast among an­a­lysts sur­veyed by Zacks In­vest­ment Re­search.

Rev­enue rose 7 per­cent to $11.11 bil­lion, but costs jumped 11 per­cent, lead­ing to lower profit. La­bor, Amer­i­can’s big­gest ex­pense, in­creased more than 12 per­cent af­ter the com­pany granted pay in­creases last year, and fuel spend­ing climbed 15 per­cent on higher pump prices. —AP

MI­AMI: In this May 27, 2015 file photo, an Amer­i­can Air­lines jet taxis to the gate at Mi­ami In­ter­na­tional Air­port, in Mi­ami. Amer­i­can Air­lines Group, Inc re­ported earn­ings on Fri­day.—AP

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