Airlines have saved billions in the past two years from falling oil prices, but cheaper jet fuel also seems to be contributing to lower fares, which pleases passengers but worries investors.
American Airlines is the latest case in point. The world’s biggest airline reported a $700 million first-quarter profit on Friday, beating Wall Street expectations.
A conference call with investors was dominated, however, by questions about a statistic indicating that average fares are still dropping and that American’s revenue this summer could be weaker than last summer.
The results mirrored those from United Airlines on Thursday, and airline stocks slumped Friday for a second straight session.
Cheaper fuel encouraged airlines to add flights that would have lost money back when oil was $100 a barrel. Since early 2015, the supply of seats has overshot travel demand, causing average fares to fall.
American doesn’t disclose the average ticket price, but the downward trend shows up in the amount that the airline gets paid per mile for each seat, a figure that is closely monitored by airline investors.
In the first quarter, that figure fell 7.5 percent from a year earlier, and American predicted that it will drop by a similar amount — somewhere between 6 percent and 8 percent — in the second quarter. The number won’t turn positive until next year, said Scott Kirby, the airline’s president.
For several quarters, flattish revenue at the airlines was masked by the huge drop in fuel price, which helped American and others post record profits last year. Now the spotlight is shining more brightly on weak revenue.
“We are disappointed in our revenue performance both in absolute level and relative to some of our peers,” CEO Doug Parker told analysts on a conference call. He added, though, the he didn’t think it would turn into a long-term problem.
American has blamed its relatively weaker revenue performance on rising competition in a few top markets including Dallas. Some analysts see a bigger problem. Vicki Bryan of bond-research firm Gimme Credit says American’s problems are partly the result of aggressively cutting fares to compete with discount airline Spirit, and she says American and United both seem to be losing highly profitably corporate travel customers to Delta.
Airline executives hope to boost prices by growing more slowly — holding down the supply of seats to match demand. This month, American and United have trimmed growth plans, especially on international routes, and Delta executives said they could do the same if revenue per mile doesn’t increase.
American Airlines Group Inc. reported that first-quarter earnings tumbled 25 percent, largely due to a provision for income taxes. The $700 million in profit still beat Wall Street expectations.
Earnings excluding one-time gains and costs mostly from its 2013 merger with US Airways were $1.25 per share. That topped the average forecast of $1.18 per share among eight analysts surveyed by Zacks Investment Research.
Net income was trimmed after American made a $417 million provision for income taxes. Last year the company set aside just $11 million for income taxes because of heavy losses that it carried over from previous years.
Revenue fell 4 percent to $9.44 billion, about in line with analysts’ forecasts.
Cheaper fuel again provided a tail wind. American and its American Eagle affiliates spent 33 percent less on fuel than they did a year ago, a savings of $607 million.
American’s labor costs rose 12 percent, or $279 million, however, as it raised pay and hired more workers — it now has about 120,000 employees.
Shares of Fort Worth-based American fell $2.07, or 5.2 percent, to $37.94 in midday trading. Shares of United, Delta, Southwest, JetBlue and Alaska were also lower.
ABC News
American Airlines profits soar to $700m
