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American Air Boss Contends Fares Too Cheap: Airline May See Profit Despite High Fuel Costs

Posted on: Saturday, 3 June 2006, 00:00 CDT

By Mark Skertic, Chicago Tribune

May 25--Demand for air travel continues to grow, and it shows no sign of slowing despite rising fares, the leader of American Airlines said Wednesday.

American, the country's largest airline, set a record last year when its planes were 78.6 percent full, and it is on pace to break that mark this year, said Gerard Arpey, chairman and chief executive of AMR Corp., American's parent.

Arpey bristled when asked if travelers were likely to balk at ticket prices that have risen by $5 and $10 increments in recent months. The industry needs to charge more for its services, he said.

"Fares have been too low; that's why the industry has lost billions and billions of dollars. That cannot go on," he said following an address to the Executives' Club of Chicago.

"Oil has gone from 10 cents from every dollar of our revenue to 30," he said. "You can't go on charging less than it costs you to produce your product. To a certain extent, airline customers have had a pretty good ride for the past five years."

The Ft. Worth-based carrier believes it is on the cusp of turning around annual losses.

"If Wall Street's current forecast is correct, this may be our most profitable year in over five years," Arpey said during his speech. "Our hard-earned progress is gratifying, but with no fuel relief in sight, it is also very fragile."

Fuel costs have tripled in recent years, wiping out profit margins and forcing some carriers to file for bankruptcy protection. United Airlines recently emerged from Chapter 11, while Delta Air Lines and Northwest Airlines have operated in bankruptcy since September.

American has lost more than $8 billion in recent years. Its long-term debt also has continued to climb, to $12.5 billion, according to the company's recent report to federal regulators.

Those losses have forced difficult decisions, including holding off orders for new planes. There are international routes American might add, but with about 1,000 aircraft in its fleet, it must first find the most efficient way to use what it has and chip away at its debt, Arpey said.

With no orders in place, it may be a while before the carrier can get new planes. Delivery slots for Boeing Co.'s 787, which is under development, are sold out through early 2011, said Mike Bair, vice president and general manager of the 787 program. The longer American puts off buying new airplanes, the longer it will have to wait for one of the industry's most-sought-after models.

Officials at the Chicago-based company have said that they expect the major domestic carriers to start ordering new planes later this year or in early 2007.

"We've got to take those 1,000 airplanes and drive them to a sufficient level of profitability so we can order more airplanes and fly to more international destinations," he told members of the audience.

mskertic@tribune.com

Tribune staff reporter Ameet Sachdev contributed to this report

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Copyright (c) 2006, Chicago Tribune

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Source: Chicago Tribune

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