American Airlines on Wednesday said it narrowed its losses in the first quarter, but profits remain an elusive target because passengers continue to get a holiday from the surging price of jet fuel.
"Even with strong demand for air travel, we have been able to pass only a very small portion of that increase on to our customers," said Gerard Arpey, chairman of AMR Corp., American's parent. American's affliction is an industry-wide problem that could get worse amid further instability in the Middle East. Despite a 10.5 percent increase in passenger revenue, AMR lost $92 million in the three months that ended March 31, compared to a net loss of $162 million in the year-earlier period.
The reasons for the red ink are the cost of jet fuel and the airline's crushing debt load of about $20 billion.
American, which accounts for about 31 percent of Lambert Field's annual operating revenue, has pushed through several fare increases in the last year. This week it added $10 to the price of domestic round-trip tickets. Other carriers have followed, but the U.S. airline industry suffers from stiff competition and having too many seats available, keeping a lid on significant ticket price increases.
Meanwhile, American's cost reduction efforts are being neutralized in the marketplace because some of its competitors have used bankruptcy reorganization laws to slash expenses in a way that American can't.
Terry Trippler, an airline industry expert at CheapSeats.com, said in some cases passengers pay fares that don't even cover the cost of an airline flight's fuel expense.
For example, he said it costs Northwest Airlines $103,400, or $253.43 per seat, to fuel a Boeing 747 with 408 seats. Trippler said he booked on Wednesday a Detroit-to-Tokyo flight on a Northwest 747 that cost him $227 one way, not including government taxes.
That leaves Northwest at a $26 deficit on Trippler's seat just for fuel.
Rising fuel costs contributed to Northwest and Delta airlines going into bankruptcy court, where they are trying to restructure their labor and debt agreements to lower costs.
American said it consumed 3 percent less fuel in the first quarter, but its costs still skyrocketed because the price per gallon increased 38 percent to $1.89. The airline said it has budgeted $700 million in cost savings for 2006, but $1 billion in added expense related to fuel will nullify what so far has been a productive collaboration between American's management and labor unions.
"I think it's fair to say that with jet fuel prices above $80 a barrel and other carriers reducing their costs beyond our own, 2006 will be another challenging year for us," AMR's chief financial officer, Tom Horton, said on a conference call.
Air Transport Association Chief Economist John Heimlich said U.S. passenger and cargo airlines consumed 19.9 billion gallons of jet fuel in worldwide operations in 2005. At that rate, every penny increase in the price of a gallon of jet fuel drives an additional $199 million in annual fuel costs for U.S. airlines.
"So if the price were a dollar higher over the course of a year, we're talking about a $19.9 billion increase in expenses," Heimlich says. "That's just staggering, and virtually impossible to pass through in an environment of limited pricing power."
STL today
.jpg)
Comment Preview