American Airlines will trim planned increases in flights for the rest of this year and may grow more slowly than rivals in 2019 as the carrier grapples with surging fuel prices that eroded profitability.
Net income dropped 35 percent to $566 million in the three months through June, the Fort Worth, Texas-based company said, despite a 3.7 percent jump in revenue, which touched $11.6 billion.
“This was perhaps the most challenging quarter for the American team since our merger with US Airways in 2013,” Chief Executive Officer Doug Parker said in a statement, noting that the company is also delaying deliveries of new plans and cutting capital investments. “These near-term challenges do not dampen our long-term excitement about the future of American Airlines.”
Rising fuel costs, spurred in-part by President Trump’s decision to withdraw from the Iran nuclear accord, are hampering profits at several domestic carriers, including Delta Air Lines, which announced this month it would trim its flight schedule for 2018. Jet fuel costs have risen nearly 40 percent since 2017 to $87.90 a barrel, according to trade group International Air Transport Association.
Parker, who said the higher fuel costs drove up expenses by $700 million in the quarter, told investors he expects the increased prices to remain.
“To the extent any of us were viewing this quick run-up as a spike that would quickly correct itself, abandon that notion. We at American are assuming that $75 a barrel brent crude or higher is our new reality,” he said on the company’s earning call.
Along with rising fuel costs, U.S. airlines are also facing potentially new, sweeping regulations included in bills to reauthorize funding for the Federal Aviation Administration. The House passed its own legislation to fund the agency earlier this year and the Senate is hoping to move its own measure before the current appropriations expires after Sept. 30.
The airline industry is aggressively fighting against a provision included in the Senate bill that would effectively regulate costs for ancillary fees like baggage charges. The Trump administration has urged the chamber to drop the language.
American on Thursday said it would drop its baggage restriction rules on low-cost basic economy bookings, which major U.S. airlines have embraced to compete against cheaper carriers like Spirit Airlines that offer reduced fares but require customers to pay to bring larger luggage on-board.
The category of booking for American previously did not come with a seat assignment and passengers were required to pay to baggage on the aircraft. Now, customers can bring luggage on-board for free.
