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Fuel costs cut American’s profit

Fuel costs cut American’s profit
Business
American Airlines Group Inc. is struggling to recoup surging fuel costs, setting the world’s largest carrier apart from competitors that have raised ticket prices and fees to boost profit.

An additional $750 million (U.S.) in fuel costs pulled American’s profit down 48% in the third quarter, the carrier based in Fort Worth, Texas, said Thursday. Hurricanes that battered the Southern U.S. also hurt American’s business.

Other airlines, by contrast, have stayed ahead of the rising fuel costs. Some are earning more from high-paying business travelers, while most carriers have raised baggage or change fees. Those increases come as U.S. consumers pay more for a range of goods and services.

Delta Air Lines Inc. said earlier this month that third-quarter profit rose 13% to $1.3 billion from a year earlier. United Continental Holdings Inc. said profit rose 30% to $836 million in the quarter, and Southwest Airlines Co. said Thursday that its profit rose 17% to $615 million in that period.

“We certainly don’t like seeing our earnings fall more than others,” American Chief Executive Doug Parker said during a call Thursday with analysts and reporters.

Mr. Parker said American was updating back-end technology that has hampered sales of premium seats and add-on services, simplifying its aircraft fleet and trimming unprofitable international flights.

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“We know what we need to do,” he said.

Shares in American were up 8.7% on Thursday afternoon amid the airline’s forecast for unit revenue to rise as much as 3.5% in the fourth quarter. Shares in Southwest were down 8.6% after the airline warned its nonfuel costs will rise at least 3% next year.

“We’re not seeing the kinds of efficiencies here as we begin to trim back the schedule that I was counting on, so we’re going to have to work that much harder to do that,” Southwest Chief Executive Gary Kelly said.

Southwest’s fuel hedges helped insulate it from higher prices. Southwest and Spirit Airlines Inc. also said they have curtailed off-peak flying.

Other airlines have found ways to offset a roughly 40% increase in jet-fuel prices over the past year. Delta said it was able to recoup 85% of its fuel-bill increase, while United said it offset about 100% of its higher costs. American said it recovered 40% of the fuel-price increase through higher fares and fees during the third quarter.

Investors and analysts have scrutinized American’s debt load, profit margins and sluggish revenue growth. They also point to increased competition as United expands, and American’s heavy exposure to economically troubled regions such as Latin America.

“They have more exposure to weaker markets, and less exposure to stronger markets,” said Stifel analyst Joe DeNardi.

Mr. Parker has said American should earn an average of $5 billion in pretax income each year. As of Sept. 30, the carrier had earned about $1.5 billion before taxes in 2018.

A difficult peak travel season didn’t help. In a record summer for U.S. air travel, American’s on-time departure rates slipped and cancellation rates increased as of July, according to government data.

American’s missteps complicate its ability to win corporate clients that prize reliability and are willing to pay a bit more for it, JPMorgan Chase & Co. analyst Jamie Baker said. Delta and United both reported revenue growth in part because of higher-paying business travelers.

American hasn’t lost market share with corporate clients, said the carrier’s president, Robert Isom.

“We know that we must do better and we will,” he said on Thursday’s call.

In recent years, American has borrowed to pay for an overhaul of its aircraft fleet. American’s total debt as of June 30 was $24 billion, more than 3.5 times its 2017 earnings before interest, taxes, depreciation and amortization. By contrast, Delta’s total debt of $9.3 billion as of Sept. 30 was about 1.1 times that earnings measure.

While American’s debt has put off many investors, those big expenditures on new planes are largely finished while other carriers are still replacing their fleets, said Cowen & Co. analyst Helane Becker.

Some investors say the steep drop in American’s shares has been an overreaction.

“We view it as a fantastic opportunity,” said Patrick Kaser, a portfolio manager at Brandywine Global, which has bought American shares recently. “We’re big holders and we’ve added to the position.”

American reported profit of $341 million, or 74 cents a share, down from $661 million, or $1.36 a share, in the same period a year earlier. Excluding special items, earnings per share were $1.13, in line with analysts’ estimates, according to FactSet. Revenue rose 5% to a record $11.6 billion.

Alaska Air Group Inc. also reported third-quarter results on Thursday, saying its profit fell 19% to $217 million despite increased revenue from bag fees.

“We’re not satisfied with our current financial returns,” Alaska CEO Brad Tilden said during a call with analysts. “Fuel prices continue to rise and we need to do more to recover these higher costs.”
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