Fuel Costs Limit 3 Airlines 2Q Profits

Published 12:00 am Monday, December 26, 2005

DALLAS – Planes crowded with vacationers helped three of the nation’s largest airlines post second-quarter profits Wednesday, but costly jet fuel limited the gains and airline executives are fretting about what will happen in the fall if oil prices stay high.

American Airlines, the nation’s biggest carrier, saw its profits rise but still fell short of Wall Street’s expectations. Parent company AMR Inc. blamed summer storms that caused flight cancelations and delays.

Delta Air Lines Inc. broke into the black two months after emerging from bankruptcy protection with a lower cost structure. And Southwest Airlines Co. reported its 65th straight profitable quarter, but it earned 17 percent less than a year ago.

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All three reported heavy passenger loads. American’s planes flew with a second-quarter record 83.6 percent of seats filled, partly because cancelations forced passengers on to fewer flights.

Chairman and Chief Executive Gerard Arpey said third quarter bookings are running slightly ahead of last year’s pace. American is trying to sell fewer discounted tickets far in advance, hoping to get higher prices closer to the departure date, which he said worked well over the summer.

Southwest said it expected heavy traffic in July and early August, but CEO Gary C. Kelly said he was “a little concerned when we get to the second half of August … knowing it’s been a rocky year.” He said his airline had been fooled when ticket demand softened this spring and didn’t want to repeat the mistake.

Delta executives were the most bullish, saying advance bookings looked solid.

Raymond Neidl, an analyst at Calyon Securities, said the third quarter is shaping up to be stronger than a year ago, “even with higher fuel prices, because traffic is stronger and yields (revenue per miles flown by passengers) should be stronger.”

Airlines have raised fares several times this year, but they also continue to sell lots of discounted seats that eat into profits. Southwest saw full-fare passengers drop to 27 percent from 33 percent a year ago.

“The planes are full of lower-fare passengers,” said Robert Barry, an analyst for Goldman Sachs.

AMR earned $317 million, or $1.08 per share, in the quarter, up from $291 million, or $1.14 per share, a year earlier. But analysts surveyed by Thomson Financial had expected $1.19 per share.

Revenue fell 1.6 percent to $5.87 billion. AMR said it lost $50 million in revenue, incurred higher costs and dropped 12 cents per share in earnings because of weather-related cancelations.

American said storms at its Dallas-Fort Worth hub and elsewhere forced it to cancel 2.1 percent of scheduled departures in the quarter, with many coming in late June.

Shares of Fort Worth-based AMR fell 48 cents, or 1.7 percent, to $27.45 on Wednesday.

Atlanta-based Delta cut billions of dollars in costs before emerging from bankruptcy protection in April. It earned $274 million, or 70 cents a share, in the second quarter when one-time items related to the bankruptcy case were excluded. That topped analysts’ forecast of an adjusted profit of 59 cents per share. A year earlier, it reported a loss of $2.21 billion.

Revenue rose 5.5 percent to $5 billion from $4.74 billion a year earlier.

Outgoing CEO Gerald Grinstein said Delta’s board will probably name his successor by the end of the summer and he will retire. The top internal candidates are Chief Financial Officer Ed Bastian and Chief Operating Officer James Whitehurst.

Delta shares rose 18 cents to $21.37 Wednesday.

Southwest earned $278 million, or 36 cents per share, down from $333 million, or 40 cents per share, a year earlier. Revenue rose to $2.58 billion from $2.45 billion a year ago.

CEO Kelly said the company might miss its financial targets for 2007, “and that’s not acceptable to us.” But its results still topped Wall Street expectations and its shares rose 13 cents to $15.72 on Wednesday.

Southwest’s revenue as a ratio of capacity _ a closely watched statistic in the airline industry _ fell 4 percent in the second quarter, however. Jamie Baker, an analyst with J.P Morgan, said that figure would have to rise an unlikely amount for Southwest to hit Wall Street’s earnings target for the third quarter.

Southwest is cutting costs. This week it delayed delivery of some jets from the Boeing Co. and offered buyouts to 8,700 workers _ one-fourth of its employees. Kelly said Southwest plans to replace veteran workers who leave with less expensive, entry-level employees.

Kelly also said Southwest could eventually increase revenue by hundreds of millions of dollars a year by offering international service through partner airlines. A U.S.-only deal with ATA Airlines is already raising $40 million a year, he said.

Southwest needs the extra revenue because its strategy of hedging fuel costs is losing effectiveness as oil prices remain high.

A service of the Associated Press(AP)