American Airlines 3Q profit soars on cheaper jet fuel

AP News
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Posted: Oct 23, 2015 4:28 PM
American Airlines 3Q profit soars on cheaper jet fuel

FORT WORTH, Texas (AP) — American Airlines plans to offer a version of the low-fare, no-frills approach to flying that is boosting profit margins at discount carriers.

Officials at American, the world's biggest airline, say they need to fight back against small but fast-growing rivals including Spirit Airlines and Frontier Airlines, which are known for cheap fares, lots of extra fees, and poor service.

American has many frequent fliers who will pay more for premium service, said Scott Kirby, the airline's president. But 87 percent — accounting for half of American's revenue — fly the airline no more than once a year, and they buy airline tickets based on price, he said.

"We have to compete for them," Kirby said. "We can't just walk away from that size of the business."

So beginning next year American will offer tickets with "less frills" but a "really cheap price" where it competes on nonstop flights with discount carriers, Kirby said. He declined to provide more details.

Kirby also said that American will change its AAdvantage frequent-flier program next year, but he declined to give details on that either. Other airlines have changed their plans from miles to points — a way of rewarding high spenders at the expense of customers who buy cheap tickets.

American disclosed its plans as executives discussed the company's record-breaking third-quarter profit. American Airlines Group Inc. reported that net income jumped 80 percent to $1.69 billion thanks to a huge drop in fuel spending.

But American's shares fell 4.7 percent — apparently on concern that price-cutting to compete with Spirit and Frontier might erode profits — before they recovered most of the loss. Spirit's stock took a bigger hit — it fell 9 percent during intraday trading. Frontier shares are not publicly traded.

Big airlines like American, Delta and United chase high-dollar business travelers with amenities such as lie-flat seats and fancy food in premium cabins and route networks that span the globe. But discounters, which include Mexico's Volaris and Norwegian Air Shuttle, are growing rapidly by appealing to consumers who want to fly as cheaply as possible.

Spirit has been possibly the most successful of the so-called ultra-low-cost carriers in the U.S. It draws the highest rate of complaints among airlines tracked by the federal government — followed closely by Frontier, which began imitating Spirit's no-frills approach last year — but has had higher profit margins than the giants.

When other airlines decided not to match Spirit's low fares, it grew to become bigger than United or Delta in Dallas-Fort Worth and bigger than Delta in Chicago, Kirby said.

American isn't the only big airline worried about the low-cost outfits. Late last year, Delta Air Lines began selling a "basic economy" ticket that doesn't allow seat selection or ticket changes and may not offer full frequent-flier benefits. It was introduced in a few markets and seen as a response to Spirit.

Some analysts are skeptical about chasing bargain travelers. Wolfe Research analyst Hunter Keay told American executives they were "blowing up yourself" by selling cheap walk-up fares to business travelers who would never board a discount airline. He has said it would be as if high-end steakhouse Ruth's Chris started a dollar menu to compete with McDonald's.

The low-cost carriers have more influence on prices as they add new destinations and routes. Kirby estimated that prices on 85 percent of American's routes are affected directly or indirectly by the discount airlines.

That is helping to push down U.S. airfares, which rose faster than inflation for several years. This year, airlines have taken advantage of cheaper fuel to increase flights or use bigger planes. They have cut prices to fill the growing number of seats.

American doesn't disclose average fares, but yield, or the amount that passengers pay for each mile they fly, fell 9.2 percent from a year ago. That contributed to a 3.9 percent decline in third-quarter revenue.

But cheaper fuel saved the quarter. American's fuel bill plunged 43 percent, a savings of $1.46 billion.

American said that excluding special items related to its merger and other items such as technology help, adjusted profit was $1.9 billion — the highest in any quarter in American's history. At $2.77 per share, the results beat the average forecast of $2.72 per share by 15 analysts surveyed by FactSet and nine analysts surveyed by Zacks Investment Research.

Fort Worth-based American also announced a $2 billion addition to its program of buying back its own stock over the next 15 months, a move that usually pleases shareholders by making existing shares more valuable. That raises the amount authorized this year for buybacks to $6 billion. The company also declared a quarterly dividend of 10 cents per share.

Shares of most U.S. airlines ended trading higher, but American was down 32 cents to $45.67 — it hit a low of $43.81 during the day — and Spirit Airlines Inc. tumbled $3.25, or 7.6 percent, to $39.79.

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This story has been corrected to show American's earnings per share beat rather than matched the FactSet estimates.

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David Koenig can be reached at http://twitter.com/airlinewriter