American Airlines’ 4Q profit falls
Tax law boosts Southwest’s as 2 carriers faced higher costs
— American Airlines reported Thursday that fourth-quarter profit slipped to $258 million, down from $289 million a year earlier, as higher costs for fuel and labor offset rising revenue.
Meanwhile, Southwest Airlines said profit for the quarter jumped to $1.89 billion, up from $522 million a year earlier, as the recent tax law reduced the company’s deferred tax liability and should boost 2018 earnings, too.
American, the world’s biggest airline, predicted that 2018 earnings would easily surpass Wall Street’s expectations, a sign of continuing strong demand for travel.
Still, American couldn’t dodge investor concern over too much growth in the airline industry, and the company’s shares were headed lower for a second-straight day.
United Airlines triggered a sharp drop in airline stocks on Wednesday when it disclosed plans to grow passenger-carrying capacity by between 4 percent and 6 percent for the next three years. Investors worry that such aggressive growth will cause a glut of seats that will lead to lower airfares and lower airline profits.
American plans to grow, but not as rapidly — more like 2.5 percent to 3 percent this year.
On a call with analysts Thursday, Chairman and Chief Executive Officer Doug Parker argued that American is growing in a more disciplined manner than “in the old
days,” when carriers expanded widely during good times — often in competitors’ strongest markets.
Parker said much of American’s growth will involve adding destinations from its own major hubs such as Dallas and increasing flights on existing routes from those hubs.
“We think it is smart, efficient growth where we have competitive advantage” and “doesn’t result in fare wars,” he said.
Excluding one-time gains and costs, American said it earned 95 cents per share. That beat the average Wall Street expectation of 92 cents per share, based on a Zacks Investment Research survey.
Fort Worth-based American said revenue rose 8.3 percent to $10.60 billion. That also beat analysts’ expectations of $10.58 billion.
On the cost side, American reported that fourth-quarter spending on fuel jumped more than 23 percent, and labor expenses rose 7 percent. That caused operating expenses to grow faster than revenue.
American said it expects 2018 earnings between $5.50 and $6.50 per share, well above the $5.32 per share forecast of analysts surveyed by FactSet.
SOUTHWEST AIRLINES
Southwest, the nation’s fourth-biggest airline, also said that travel bookings so far in 2018 appear solid, and it gave a cautiously upbeat forecast of revenue in the first quarter.
The report indicated, however, that despite the rise in profits, Southwest also continues to be dogged by rising costs for labor and fuel. Overall, costs are rising nearly twice as fast as revenue.
Strong demand for travel is boosting Southwest and other carriers, although investors worry that the airlines are undercutting their ability to raise fares by adding too many flights and seats.
Southwest, for example, posted its best-ever fourth
quarter for seats sold — 85 percent on the average flight — but the average one-way fare still fell nearly 3 percent, to $140.60.
Much of Dallas-based Southwest’s 2017 earnings increase was from a $1.15 billion reduction in Southwest’s liability for deferred taxes because of the new tax law. The law cut the corporate income-tax rate from 35 percent to 21 percent.
Chairman and CEO Gary Kelly said the lower rate will save Southwest hundreds of millions of dollars, “which will significantly boost our earnings in 2018.”
Excluding one-time items, the company said, it earned 77 cents per share, a penny better than the average forecast, according to Zacks Investment Research.
Revenue rose 3.9 percent to $5.27 billion, also topping analysts’ expectations.
However, costs climbed 6.4 percent, led by a 12.6 percent rise in labor expenses and a 7.7 percent increase for fuel.
Southwest forecast that revenue for every seat flown 1 mile — a figure that airline investors watch closely — will rise by between 1 percent and 2 percent in the first quarter, compared with the same period in 2017.
Southwest set a record for full-year profit, earning $3.49 billion in 2017, up from $2.24 billion in 2016.
Kelly said Southwest was using the profit to buy new planes, upgrade its technology and reward shareholders. In 2017, the company spent $1.9 billion on dividends and repurchasing its stock, which makes the remaining shares more valuable. It paid $543 million in profit-sharing for employees, who also got $1,000 bonuses this month, which the company tied to the lower tax rate.
Southwest plans to begin flying to Hawaii — first it needs federal approval to operate the over-ocean flights — and said Thursday that it would also begin serving Paine Field in Everett, Wash., near Seattle, joining Alaska Airlines and United Airlines in offering commercial flights there.