Airline shares fall after earnings from American, Southwest

American Airlines saw stronger revenues as demand for air travel remains strong, notably in Latin America
AFP

New York (AFP) – Shares of US carriers tumbled Thursday after American Airlines warned of higher fuel costs and Southwest Airlines reported a drop in bookings following a tragic flight last week that ended with a fatality and emergency landing.

The results highlighted new worries at two of the four biggest US carriers even as a strong economy boosts corporate and leisure travel, enabling both companies to report record revenues in the first three months of the year. 

American Airlines chief executive Doug Parker said jet fuel prices have risen “very quickly,” catching the company off guard and playing a role in a 45.2 percent drop in first-quarter profits to $186 million despite a 5.9 percent jump in revenues to $10.4 billion.

Parker said higher fuel costs could lead the company to reduce some flight capacity, but not until after the summer travel season.

He predicted ticket prices would rise if higher energy costs becomes a “new normal”, something that now looks more likely.

“As the cost of production goes up, the cost of the product generally follows,” Parker said. If fuel prices stay high, “I would expect you would see higher fares to consumers over time.”

Chief Financial Officer Derek Kerr said that based on pricing as of April 20, fuel will cost $2.3 billion, or 30 percent more in 2018 than last year. 

In spite of the hit from higher fuel, American described air travel demand as “robust” and said passenger revenue per available seat mile, a key industry benchmark, grew in all regions, especially Latin America.

– Advertising blackout –

Southwest executives also described overall travel demand as robust, but said bookings had suffered after last week’s incident, in which the left engine suddenly blew apart on Flight 1380 from New York to Dallas, killing a woman and forcing an emergency landing in Philadelphia.

The airline estimates that lost bookings following the accident would result in a $50 million to $100 million revenue hit in the second quarter, chief financial officer Tammy Romo said.

Southwest immediately removed all of its marketing on social media, television and paid Internet search after the accident, leading to fewer visits and bookings on the company’s website.

Some of the company’s marketing “has a lot of fun” and “a lot of personality” and “we don’t think it’s appropriate yet to bring that back online,” said Southwest president Tom Nealon said.

The company’s marketing department is “just listening for the sentiment, when does it feel appropriate for us to go back into the market,” he said.

Southwest began slowly resuming some ads over the weekend, leading to a modest bump in website booking.

“But it is not yet back to normal levels,” he said. “And I think that with an event like this, this is pretty much what I’d expect to see. Traffic will rebound, but it’s not there yet.”

– Ongoing investigation –

The airline continues to cooperate with a National Transportation Safety Board investigation of the incident, which regulators believe was due to a broken fan blade. The airline is accelerating inspections 18,500 fan blades that were not previously reviewed and will be finished by the end of the year.

Southwest found one previous blade with cracking in 2017 that was removed, executives said.

The company a 36.6 percent jump in first-quarter earnings to $463 million, due in part to a lower tax rate following December’s corporate tax cuts.

Like American, Southwest saw record revenues of $4.9 billion, up 1.9 percent. 

Fuel costs rose 6.5 percent to $1.0 billion and the airline said second-quarter fuel costs are projected at $2.20 a gallon, up 10.6 percent from the year-ago period.

“If fuel escalates more rapidly clearly that will put more pressure on us,” Southwest chief executive Gary Kelly said. “What we have now is not an issue.”

American Airlines shares tumbled 6.4 percent to $42.37 in afternoon trading, while Southwest Airlines fell more than two percent before recovering to close at $53.28, a one percent drop.

.