Airline shareholders like soft landings as much as airline passengers do. American Airlines’ investors are out of luck. On Wednesday, it became the latest US carrier to admit that high fuel and labour costs would affect profits more than expected.
The Texas-based company halved its operating margin forecast from 10 per cent to 5 per cent. It said jet fuel would cost as much as $3 per gallon, up from a previous estimate of around $2.60. It has also agreed a deal with pilots to raise their pay by more than 40 per cent over four years.
Since the easing of pandemic restrictions, airlines have been on the knife edge of two types of leverage. First, operating, where slight increases in passenger loads contribute to core profits. Second, financial, where small increases in core profit mushroom to net income.
American Airlines’ shares rallied from $9 at the depth of the pandemic to as high as $25 in 2021. Since that peak, the stock price has fallen by more than 40 per cent despite rising flyer volume. The heavy debt burden it took on during 2020, which now totals $40bn, weighs on the company at a time when operating costs are rising.
American said it expected revenue per “seat mile” — a measure of efficiency — to drop by as much as 6.5 per cent in the current quarter. This is in line with previous expectations. But like most airlines, it has boosted the volume of flights to match surging demand and keep overall revenue neutral or growing.
The question for the broader industry is whether to curtail capacity in order to both boost efficiency and push airfares higher.
If the broader economy wobbles into a recession, airlines face the twin problems of high fixed costs and weakened revenue prospects. It is notable that American still believes this quarter will be profitable, even if meaningfully less. There will be more bumps on the way down.
This article originally appeared on The Financial Times