American Airlines, Delta Post Steep Losses as Oil Costs Soar
Thursday, July 17, 2008
American Airlines parent AMR and Delta Air Lines yesterday reported steep losses in the second quarter of the year, as the surging cost of oil began to push the industry into survival mode.
For passengers, airlines' declining profitability will mean deeper cuts to service and higher ticket prices in the months ahead as carriers try to shift the new costs to travelers.
American Airlines, the nation's largest carrier, reported a loss of $1.45 billion. Delta Air Lines posted a $1.04 billion loss. Both companies blamed the losses on record costs for jet fuel. On a conference call yesterday, Gerard Arpey, chairman and chief executive of American Airlines, said the oil price increase has been "nothing short of breathtaking."
American Airlines said fuel prices added $838 million in costs compared with the same period last year. Delta, which is buying Northwest Airlines, said its fuel costs in the quarter jumped by $1 billion compared with last year. U.S. air carriers are projected to pay $61 billion for jet fuel this year, up $20 billion from a year earlier and double what they paid in 2004, according to the Air Transport Association, an industry trade group.
Analysts say American Airlines, Delta and other major airlines are entering a high-stakes period over the next 18 months that could bring about a major industry shakeout. Analysts say many airlines have enough cash on hand -- made during the peak spring and summer travel seasons -- to keep operations alive through the end of the year. But profitability next year will become more critical as airlines burn through cash paying jet fuel bills.
"We're going to have less airlines one way or another -- either we will have consolidation at some point or certain airlines will got out of business," said Ray Neidl, an analyst with Calyon Securities. "At these high oil prices, we cannot support the size of the industry that we have now. We have too many airlines with too many seats and too many hubs."
To cope, airlines are retiring hundreds of their oldest and least-fuel-efficient aircraft. They are stockpiling cash and shrinking their networks by cutting flights. At the same time they will continue raising ticket prices. Airline executives also say they are worried that higher fares, coupled with a slowing economy, could drive passenger traffic levels too low to support their businesses.
At American Airlines, Arpey said "nothing was off the table" as the carrier tries to reconstitute itself at $130 a barrel oil. In the second quarter, the airline took about $1.2 billion in charges to write down the value of grounded planes and to pay severance costs from job cuts. In May, American Airlines said it would slash its U.S. flying capacity by as much as 12 percent in the second half of the year and said it may cut as many as 6,000 employees. Other big U.S. carriers have announced similar-size cutbacks, and most, including American, have not ruled out more cuts in coming months.
Delta plans to cut about 4,000 jobs this year. The airline has also announced a $25 charge for redeeming frequent flier miles on U.S. tickets and $50 for international travel. Delta and other airlines have also resorted to placing ads on boarding passes.
Delta executives said fuel costs in the quarter overshadowed revenue gains from new passenger fees and expansion into overseas markets. Richard Anderson, Delta's chief executive, said Delta was determined to be a "formidable competitor" for the long-term.
"We're spending a lot of time rethinking what that model, what the industry model looks like and how you make it work at those levels," Anderson said.
Industry analysts are beginning to describe a new world of air travel with higher ticket prices and fewer competitors. One called it the "promised land" for airline profits. But some airlines may never see it, analysts say, either because they get swallowed up or go bankrupt along the way.
"The survivors will be the ones that will be the most nimble in adapting -- the ones that have the most cash reserves and have the best cost structure," Neidl said.
Shares of both AMR and Delta climbed yesterday. Analysts say the airlines had stronger-than-expected results, perhaps leading investors to think the two companies might be in a position to outperform rivals. Airline sector stocks also benefited from a second day of declines in oil prices. AMR shares climbed 32 percent to $5.82 yesterday. Delta closed at $5.91, up 27 percent.