Tags: Jet | Fuel | Price | Rise | Risk | Airlines

Jet Fuel's Price Rise Poses Risk to Airlines

Thursday, 22 Apr 2010 01:34 PM

 

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A jump in fuel prices poses one major obstacle for the U.S. airline industry's recovery, just as major carriers are starting to feel the benefits of tighter capacity and greater travel demand.

In its quarterly report posted on Wednesday, AMR Corp., parent of American Airlines, said it paid $211 million more for jet fuel in the first quarter than it did a year ago.

The chief executive of AirTran Holdings Inc., which also reported first-quarter results, said if fuel rose further it would "cut directly" into the company's profits.

"If you would have asked me a year ago, when we were down about $50 (a barrel), whether (I) thought oil would be back here at $80 so quickly, I would say I'd be surprised," said CEO Robert Fornaro in an interview with Reuters.

Shares of the two companies tumbled in afternoon trading, falling the most since October 2009. The Arca Airline index slumped 3 percent.

Crude oil futures were down slightly at $83 Thursday afternoon.

The surge in oil costs in 2008 and the drop in business travel in 2009 hobbled U.S. airlines, forcing them to cut jobs, capacity and add new fees to survive.

In the first quarter, American was able to raise ticket prices, while AirTran said it expects to be profitable in the next three quarters. Talk of airline mergers has boosted sentiment about the industry, which would benefit from less competition.

Both AirTran and American reported a rise in revenue, but also higher expenses tied to heavy snowstorms that hammered the East Coast of the United States in February and two earthquakes in Haiti and Chile.

American lost between $20 million and $25 million from bad weather and natural disasters. The snowstorms cost low-cost AirTran "at least" $10 million in revenue, Fornaro said.

The disruption of air traffic caused by the volcanic ash hovering over Europe will likely be another source of rising costs for American in the current quarter.

In an employee memo, AMR CEO Gerard Arpey said the situation in Europe remains "fluid" and is "changing hourly." Tens of thousands of its customers were inconvenienced and several hundred employees were trying to get home, Arpey said.

AMR posted a wider-than-expected quarterly loss even as its revenue jumped 4.7 percent to $5.1 billion. The second-largest U.S. airline said the loss widened to $505 million, or $1.52 per share, from $375 million, or $1.35 per share, a year earlier.

Excluding a special item related to the devaluation of the Venezuelan currency in January, AMR lost $1.36 per share. On average, analysts had expected a loss of $1.31, according to Thomson Reuters I/B/E/S.
In an employee memo, Arpey said the results indicated that "we remain regrettably far from our goal of sustained profitability."

Arpey said AMR would continue to focus on ways to boost its network, manage costs and drum up other sources of revenue.

Robert Herbst, an airline analyst, pilot and founder of AirlineFinancials.com, said American needed to resolve labor-cost issues to improve chances for profitability.

Rivals went through restructurings that helped them lower labor expenses.

The "revenue performance is very strong relative to the industry," Herbst said. "Their problems are just the cost side of it."

AirTran's first-quarter net loss was $12 million, or 9 cents a share, compared with a year-earlier profit of $28.7 million, or 21 cents a share.

Excluding one-time items, the company posted a loss of 12 cents per share, roughly in line with analyst expectations, according to Thomson Reuters I/B/E/S.

First-quarter revenue rose about 12 percent to $605.1 million, compared with $606.2 million expected by analysts.

Operating expenses rose about 22 percent, mostly due to fuel costs, which accounted for the bulk of the increase. Fuel is 36 percent of AirTran's expenses. It is hedged 47 percent for the rest of the year, Fornaro said.

Still, AirTran cited "significant revenue growth and passenger demand" as the economic recovery takes hold. The company said second-quarter unit revenue could rise as much as 14 percent.

© 2014 Thomson/Reuters. All rights reserved.

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