Airline revenue up, but so are expenses
Surging fuel prices rattle investors, sinking stocks
DALLAS » Airlines have figured out how to extract more money from passengers, and theywill need it to cover rising costs for their own fuel, labor and other expenses.
Not long ago, investors demanded that the airlines boost prices, even if it meant reducing flights to create a shortage of seats. Now they are obsessed with controlling expenses.
They punished Southwest Airlines on Thursday after the carrier warned about a surprisingly large increase in costs next year. Southwest reported a 16 percent increase in thirdquarter profit on higher revenue, beating expec- tations, but the shares dropped more than 8 percent in afternoon trading.
On the other hand, American Airlines Group reported that its profit plunged 48 percent from a year ago because it failed to fully pass on $750 million in higher fuel prices to consumers. Yet American’s shares climbed 8 percent after company executives laid out a plan to reduce spending, boost revenue, and grow earnings next year.
All four of the largest U. S. airlines saw higher revenue in the third quarter than a year ago, and revenue per seat, a standin for average prices, is rising. Empty seats are hard to find. United Airlines President Scott Kirby called it “one of the best revenue environments we’ve ever seen.”
Airlines are facing a strong headwind, however, from surging fuel prices. Spot prices are up about 35 percent from this time last year, according to government figures.
United said this month that it was recovering its entire fuel- cost increase from passengers, and Delta said it was covering about 85 percent. American, however, said Thursday that it recovered just 40 percent in the third quarter.
“Our revenues are up, but not as much as those two airlines,” said American Chairman and CEO Doug Parker. Delta in particular is doing a better job of upselling customers on premium offerings, he said, while promising that American would get better at that too by improving its ticket-selling technology.
Parker said American can find $1 billion in new revenue, much of it by selling upgraded “premium economy” seats on international f lights and nofrills “basic economy” on more U. S. and international routes. To control costs, American will grow more slowly, cancel unprofitable flights like those between Chicago and China, save $1.2 billion by delaying delivery of 22 new Airbus jets over the next three years, and cut at least 100 management jobs.
Some investors applauded the plan.
“I was very pleased to hear that,” said Chris Terry, portfolio manager at Dallas-based Hodges Funds, which owns about 275,000 shares of American. “They are not just sitting back and waiting on things to happen.”