December 5, 2023

Quake and Fuel Expense Cut Into Carriers’ Revenue

The rise in jet fuel prices — up 50 percent in the last year — has been particularly tough, airline executives said. And even though the airlines have repeatedly resorted to fare increases this year, higher fuel costs have largely eroded their revenue gains. Fuel now accounts for about 40 percent of an airline’s costs, up from about 30 percent last year.

Still, analysts pointed out that the negative picture largely masked the fact that the struggling industry remained on a slow path to recovery, in large part because of a rebound in business travel.

Deutsche Bank expects carriers to post a cumulative loss of about $1 billion with overall revenue of $30 billion for the last quarter. The carriers are still expected to post a profit for the full year, a measure of the industry’s gradual recovery that began in 2010.

While airlines said travel demand was still strong, they feared it might slow down later this year if fuel prices kept rising. Both American Airlines and United Continental said they were now considering small cuts in their capacity.

So far this year, the airlines have also successfully increased fares seven times out of 11 attempts. The latest effort was initiated this week by Delta Air Lines, whose increase in coach fares by $10 for a round-trip ticket was matched by other airlines, according to

With airlines merging, there are also fewer competitors willing to undercut prices to gain market share. Southwest Airlines, which has not usually followed fare increases in the past, has participated in all the successful increases in ticket prices this year.

Southwest, in reporting its results on Thursday, said it expected its acquisition of AirTran to close on May 2. It was one of the few carriers to have a profit in the first quarter. Most others, including American Airlines and United, lost money in the period.

“I have to confess that I don’t like fare increases for our customers, but they are necessary in this soaring fuel environment,” Gary Kelly, the chairman of Southwest, said in a conference call. “I don’t feel like we’ve reached a tipping point.”

Airlines have also laid out plans to pare capacity. United Continental, in the midst of merging the two airlines’ operations, has said it planned to cut its seats by 1 percent by May and 4 percent by September. Jeffery A. Smisek, the chief executive of United Continental Holdings, said he was determined to further slash capacity if fuel prices remained high.

“These are very tough times,” Mr. Smisek said in his conference call on Thursday. “We are faced with the sobering reality of resizing the entire business. We must reduce our costs as we reduce our capacity. In this volatile environment, every new route requires a stronger business case.”

“With high fuel prices, we have raised our fares, which reduces demand,” Mr. Smisek said.

The operations of United Airlines and Continental Airlines posted a loss in the first quarter as a sharp increase in fuel costs largely offset gains in revenue, the parent company announced Thursday.

The loss was $213 million, or 65 cents a share, for United Continental Holdings, the company created by the airlines’ merger. That compares with a consolidated loss of $183 million, or 58 cents a share, in the same period last year, before the merger.

Revenue rose 11 percent, to $8.2 billion. But fuel costs surged nearly 35 percent, to $2.8 billion.

Southwest reported Thursday that its first-quarter profit was $5 million, down from $11 million in the period last year. Its revenue rose 18 percent, to $3.1 billion.

Alaska Airlines, too, had a profit of $74.2 million, up from $5.3 million in the period last year.

American Airlines on Wednesday reported a loss in the first quarter of $436 million, or $1.31 a share, compared with a loss of $505 million, or $1.52 a share, in the quarter a year ago.

Delta Air Lines will report its earnings next Tuesday.

The earthquake in Japan, which is one of the world’s largest airline markets accounting for 10 percent of global travel, has sharply cut into business travel for American carriers. The drop coincided with the start of business alliances between American Airlines and Japan Airlines, or JAL, and United Airlines with ANA.

Separately, US Airways filed a lawsuit against Sabre Holdings, the nation’s largest distributor of airline tickets, accusing it of “anticompetitive and anticonsumer practices.”

The lawsuit is the latest salvo in the airline industry’s effort to sell tickets directly to travel agents, to reduce their distribution costs, which have historically been centralized by global distribution systems like Sabre.

Also this week, American Airlines sued Travelport, another of the distribution systems, as well as Orbitz, for similar reasons.

US Airways said in its suit that Sabre had been “aggressively” suppressing the ability of travel agents to book tickets directly with airlines.

A Sabre spokeswoman said that the company was aware of the actions of US Airways and was reviewing the lawsuit.

Article source:

Speak Your Mind