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American Cuts Red Ink Sharply

Posted on: Thursday, 20 April 2006, 06:00 CDT

By David Wethe, Fort Worth Star-Telegram, Texas

Apr. 20--American Airlines reported a loss of $92 million in the first quarter -- less red ink than a year ago and better than analysts had expected -- as strong passenger and cargo traffic along with higher fares helped combat rising fuel costs.

But Gerard Arpey, chairman and chief executive of AMR Corp., the airline's Fort Worth-based parent company, told analysts and reporters in a conference call Wednesday that the company's three-year-old turnaround is not over yet.

"Our first-quarter loss of $92 million illustrates the fact that we still have a lot of work to do to be able to achieve our goal of meaningful and sustained profitability," Arpey said. "High fuel prices, cost-competitiveness in the industry, low-cost carrier growth and our heavy debt burden are some of the more significant challenges ahead."

American's loss, which breaks down to 49 cents per share for the quarter, was 43 percent better than last year's quarterly loss of $162 million, or $1 per share.

It's also better than the 78 cents-per-share consensus loss predicted by Wall Street.

Jamie Baker, analyst at JP Morgan Securities, called the loss "respectable" in a note to investors.

"Relative to expectations, upside appears to have come entirely from cargo revenue, which at $186 million represents a first-quarter record and AMR's third-highest quarterly performance in its history," Baker wrote.

Shares of AMR (ticker: AMR) rose 92 cents Wednesday to close at $24.74.

The cargo revenue, which was helped by a 5 percent increase in the amount of U.S. mail carried by its planes, was up from $183 million for the same period last year.

Total quarterly revenue rose 12.5 percent, to $5.3 billion. The extra money has come from a variety of places.

The company's maintenance and engineering division was able to wring out an extra $12 million in the first quarter by servicing other carriers' airplanes.

The world's largest airline recorded an 11 percent increase in passenger revenue per available seat mile, a common industry measurement.

American's planes flew with an average of 77 percent of their seats filled.. That's an increase of 2 percentage points. Average fares grew 8 percent.

"Strong demand and reduced capacity has allowed us to raise fares several times over the past year to offset record high jet fuel prices," Arpey said.

The airline again raised fares late Tuesday for its domestic routes by $5 each way. This excludes full-fare coach and first-class tickets, which were bumped up last week.

Arpey said he is not too worried about how customers will react to the price increase.

"If you look at the past four years, this industry has given away billions of dollars worth of airline travel, and that can't go on," he said. "The consumer has enjoyed these below-cost prices for many years now, and obviously that can't go on forever. An industry has to recoup its costs in order to be sustainable."

But for all the revenue improvement, fuel remains a concern at American.

The carrier paid an additional $349 million in the quarter for fuel compared with the same period last year. The company has hedged about 23 percent of its fuel costs for the rest of the year at $61 a barrel. Oil prices this week have surged beyond $70 a barrel to record levels; futures prices closed at $72.17 a barrel Wednesday on the New York Mercantile Exchange.

American plans to put 27 of its MD80 aircraft into temporary storage by July 1 as a way to save money by reducing capacity.

Arpey said he wasn't concerned about now having enough seats to meet demand in what is expected to be a busy summer travel season, with some estimating that planes could be 90 percent full.

"We've got 10 load factor points of empty seats that we've got to fill," Arpey said. "We'll be ready to handle those load factors."

Mark Streeter, another analyst at JP Morgan Securities, said in a note to investors Wednesday that American has built up a healthy cash cushion.

"In our opinion, given $4.3 billion of unrestricted cash at AMR, it would require a major industry meltdown to push AMR into bankruptcy," he wrote.

The company paid down a small part of its $20 billion debt in the first quarter, company officials said.

American released a letter that Arpey sent to all employees Wednesday.

"While fuel prices remain a wild card, the consensus view on Wall Street -- from the folks who follow our industry for a living -- is that 2006 will be our first profitable year since 2000," Arpey wrote. "We have a golden opportunity to prove them right, and the naysayers wrong."

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David Wethe, (817) 685-3803 dwethe@star-telegram.com

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Copyright (c) 2006, Fort Worth Star-Telegram, Texas

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Source: Fort Worth Star-Telegram (Fort Worth, Texas)

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