2 airlines lose nearly $2.5 billion
High fuel costs continued to batter the air travel industry Wednesday as two of the nation’s largest carriers, American Airlines and Delta Air Lines Inc., posted losses totaling nearly $2.5 billion for the second quarter.
They were the first of several dismal airline earnings reports that are expected over the next week.
But airline shares surged as oil prices declined sharply for the second day and the quarterly results for American and Delta turned out better than analysts expected. Shares of American’s parent, AMR Corp., climbed $1.41, or 32%, to $5.82, while Delta rose $1.24, or 27%, to $5.74.
Airline investors were buoyed by the possibility of a sustained drop in oil prices, which would provide welcome relief to an industry that has been one of the hardest hit by rising fuel expenses. The cost of crude tumbled $4.41 to $134.60 a barrel Wednesday after plummeting $6.44 the day before.
But don’t expect airlines to pass along the benefits of falling oil prices to passengers any time soon. To cope with high fuel expenses, airlines have been raising fares, adding fees for services that had long been included in the price of a plane ticket and cutting back on flights. That is not expected to change even if fuel prices continue to fall.
“If oil prices retreated, that would be a good thing, but that wouldn’t necessarily mean we or the industry should give back anything that we’ve gained in terms of pricing or fees,” AMR Chief Executive Gerard Arpey said in a conference call.
“Even before the surge in oil prices, the industry was not generating enough revenues to produce enough profits to produce a satisfactory return on investments,” Arpey said.
Ray Neidl, an airline analyst with Calyon Securities, said falling oil prices could help the industry “avert a disaster” that could include major airlines going out of business. Even if oil prices dropped to $100 a barrel, the industry would still need to undergo a major restructuring to remain financially viable, he said.
“You would still have to cut passenger capacity by 20% and hike fares by 20%,” Neidl said.
For now, fuel costs continue to hammer away at industry profits.
American, the nation’s largest carrier and the busiest airline at Los Angeles International Airport, said it lost $1.45 billion in the second quarter as it took a $1.1-billion charge against earnings to reflect the declining value of older aircraft that it is taking out of service.
Excluding the one-time charge, the airline posted a loss of $284 million, or $1.13 a share, as fuel costs jumped $838 million. American reported a profit of $317 million in the same period last year. Analysts were expecting the Fort Worth-based airline to post a loss of about $1.40 a share.
Arpey said in a memo to employees that “revenue performance during the second quarter was actually reasonably good,” but the revenue gains “didn’t come close to matching the extraordinary rise in the price of fuel.”
Revenue rose 5.1% from a year earlier to $6.18 billion.
Arpey said the airline paid an average of $3.19 a gallon for jet fuel in the quarter, up 53% from $2.09 a year earlier. The airline is currently paying more than $4 a gallon, he said.
“Our company continues to be severely challenged by the fuel crisis that has afflicted our entire industry, and we expect these difficulties to continue for the foreseeable future,” Arpey said.
American expects to make further cuts in service next year as it grounds older, less-fuel-efficient Airbus A300 jetliners earlier than planned. And “given the current environment,” the airline said it had “decided to place on hold” the sale of its American Eagle regional carrier.
Delta, the third-largest airline in the U.S. and the fourth-busiest at LAX, reported a loss of $1.04 billion in the second quarter after it took a $1.2-billion charge to write down the declining value of its so-called intangible goodwill, or the value of the company’s brand and reputation.
Without the charge, Delta said, it would have posted a profit of $137 million, or 35 cents a share, down from earnings of $274 million a year ago. Analysts were expecting a profit of about 10 cents a share.
Revenue rose 10% to $5.5 billion as Delta focused more on the lucrative international travel market.
At the same time, the Atlanta-based airline cut costs and hedged a higher percentage of its fuel, allowing it to reduce fuel expenses.
Delta said it expected its merger with Northwest Airlines to close by the end of the year and to lead to $2 billion in annual savings by 2012. The merger with Eagan, Minn.-based Northwest will create the world’s largest airline, surpassing American.
Consolidating facilities at LAX alone could save the merged company $100 million a year, Delta said.
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