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American Airlines 3Q Profit Falls on Lower Revenue

By on October 20, 2016

In this Monday, Aug. 1, 2016, photo, passengers walk to their gates through the terminal as American Airlines planes wait to depart at O'Hare International Airport in Chicago. American Airlines reports financial results Thursday, Oct. 20. (AP Photo/Kiichiro Sato)

In this Monday, Aug. 1, 2016, photo, passengers walk to their gates through the terminal as American Airlines planes wait to depart at O’Hare International Airport in Chicago. (AP Photo/Kiichiro Sato)

FORT WORTH, Texas — More empty seats and higher labor costs are cutting into profit at American Airlines.

But in an encouraging sign for airlines and their investors – and a worrisome one for passengers – American is offering new evidence that higher fares could be just around the corner.

The world’s biggest carrier reported Thursday that third-quarter earnings fell 56 percent and would have dropped even more if it weren’t for continuing low fuel prices.

The company earned $737 million, down from $1.69 billion a year earlier. Revenue slipped 1 percent but costs rose 5 percent.

American was still able to claim that it beat Wall Street expectations. Excluding what it deemed non-repeating costs, mostly related to its 2013 merger with US Airways, the company said it would have earned $1.76 per share. That topped the $1.67 per share forecast from analysts surveyed by FactSet.

American doesn’t disclose the average fare that passengers pay, but it apparently declined less than 1 percent. Another key figure, revenue for every seat flown one mile, fell 3.3 percent, partly due to lower fares but mostly because the average flight was less full – about three to seven more empty seats on average – than during summer 2015.

The decline in that money-per-seat figure, called unit revenue, was less severe than at Delta or United and was the smallest recorded at American since the first quarter of last year.

Translation: Airfares have been falling for two years, but they may be about to rise as airlines scale back their growth plans and limit the supply of seats. American plans to grow just 1 percent next year, less than half its expansion pace in the first nine months of this year.

CEO Doug Parker said while revenue was down again in the third quarter, “we are encouraged by the trends.”

American got a break again on fuel prices, although not as big as in recent quarters. The airline and its regional subsidiaries spent 11 percent less on fuel than they did in the third quarter of 2015.

Labor costs jumped 15 percent, however, as union workers won pay raises to make up for years of lower wages after the industry downturn in the previous decade.

Executives said most of the labor-cost increases were behind the company. They added that since the integration of American and US Airways is now mostly complete, they will be able to eliminate an undisclosed number of redundant jobs through attrition and perhaps incentives for workers to take early retirement. They said layoffs would not be necessary.

Analysts generally applauded American’s upbeat comments about expected revenue trends over the next few months, although J.P. Morgan said that was offset by an “uninspiring” forecast of fourth-quarter profit margin.

Barring catastrophe, American Airlines Group Inc. is poised to produce its third straight year of multi-billion-dollar profits after emerging from bankruptcy protection. Parker said the airline was using the money to invest in new planes and airport lounges and to reward shareholders with dividends and the repurchase of company stock.

“The U.S. airline industry has been transformed, and American Airlines is well-positioned for success in the new world,” he said on a conference call with analysts and reporters.

Shares of American dipped 4 cents to close at $40.59. The shares fell 33 percent in the first six months of 2016 but have rebounded and are now just 4 percent lower for the year.

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