United Continental and US Airways reported smaller third-quarter profits on Thursday after their jet fuel bills spiked, showing the limits of the "charge more and fly less" strategy that airlines are relying on.
The five biggest airlines saw their jet fuel costs rise by $3.14 billion during the quarter that ended Sept. 30. They've been determined to raise fares to cover those big fuel bills, and to fly only when and where they can do it profitably.
The results have been mixed. Profits shrank at United and US Airways, but at least they had profits. American Airlines had higher expenses in addition to fuel, and parent AMR Corp. lost $162 million. Southwest Airlines Co. lost $140 million on fuel hedges. Only Delta Air Lines Inc. reported a bigger profit compared with a year ago, up 50 percent to $549 million.
The strategy is right and it will eventually produce larger profits instead of smaller ones, said US Airways Chairman and CEO Doug Parker. "The industry has gotten itself to where it can adjust," he said. "It just happened too quickly."
Profits at US Airways dropped 68 percent to $76 million. A year ago it earned $240 million. With higher fares, revenue rose 8 percent to $3.44 billion.
United Continental Holdings Inc. profits fell 23 percent to $653 million, from $852 million a year earlier. Revenue rose almost 9 percent to $10.17 billion.
Despite the heavy burden of fuel costs, things aren't as bad for airlines as they were three years ago. An oil price spike over the summer of 2008 caused huge losses, but that's not happening now.
"There would have been billion-dollar losses throughout the industry with oil where it is right now," said Standard & Poor's airline analyst Jim Corridore. "They've done a great job of cutting costs and adjusting to the new environment."
Part of that has been a determination to raise fares.
Rick Seaney, the CEO of FareCompare.com, has counted 18 attempted fare increases this year. About half of those have succeeded. The most recent try was led by United and Delta. It would have boosted tickets by up to $10 per round trip, but it fell apart on Thursday after Southwest and JetBlue didn't match it.
Seaney said it will be hard for airlines to raise prices more in this economy, during what is normally a slow season for travel. "I expect them to continue to try to raise fares, but it's rare to do this in October," he said.
Per-mile prices have risen 9.1 percent for domestic flights this year through September, according to the Air Transport Association.
With fares higher and the economy weak, fewer people have been flying. United Continental traffic fell 1.5 percent for the quarter compared with a year ago. United Continental CEO Jeff Smisek said he expected leisure demand to drop because of the higher prices.
If demand falls more, "we will respond nimbly and appropriately by decreasing capacity and taking costs out to help ensure we remain profitable throughout the business cycle," Smisek said
The amount of flying United Continental does will be flat next year, with domestic flying down and international flying up. The airline will be 8 percent smaller next year than in 2007, if United and Continental had been one airline then.
The United Continental plans to convert 14 Boeing 767s flown on domestic routes to an international setup with better seats in business class and on-demand video. It will also begin flying five new 787s by the second half of the year.
Volatility in the stock market has hurt airline shares, with the Arca airline index down more than 28 percent during the three months ending Sept. 30. The biggest decliner was AMR, down 45.2 percent.
On Thursday, shares of Chicago-based United Continental fell 23 cents to close at $20.11. Shares of Tempe, Ariz.-based US Airways Group Inc. rose 17 cents, or 3 percent, to close at $5.83.
AP Airlines Writer David Koenig in Dallas contributed to this report.