American Airlines sees no improvement in domestic demand in the third quarter, after passenger unit revenues fell 5% in the second quarter.
“No, we don’t see any improvement in the domestic market but it’s not getting any worse,” says Scott Kirby, president of the Fort Worth, Texas-based carrier, during a second quarter earnings call today. “The basic trends domestically are largely unchanged.”
United Airlines executives made a similar statement on 23 July, saying domestic demand had levelled off from the drop it experienced during the first half of the year.
As a result of the weaker demand, American has reduced its system annual capacity growth by one percentage point to a roughly 1% increase in 2015. Domestic capacity will increase 1% to 2% and international capacity about 1%.
Capacity will still increase at a roughly 3% rate in the third quarter, despite the unchanged domestic environment. This net increase includes two points from increased stage lengths, two points from increased gauge on a three-point decrease in departures.
American is forecasting a 6% to 8% decrease in passenger revenue per available seat mile (PRASM) in the third quarter. This follows a 6.9% decrease during the second quarter.
Competitors Delta Air Lines forecasts an 4.5% to 5.5% decrease in PRASM and United Airlines a 5% to 7% decrease during the forthcoming quarter.
Kirby declines to comment on whether domestic PRASM at American will decrease more or less in the third quarter than the 5% drop in the second.
The airline’s Dallas/Fort Worth base continues to be a point of domestic weakness, as Southwest Airlines plans to add eight new markets from Dallas Love Field in August. Kirby says PRASM at the hub decreased 5% in the second quarter and will likely fall again in the third quarter.
International unit revenue pressures continue at American. They include the strong US dollar, lower fuel surcharges abroad, pressure in Venezuela and the poor economic environment in Brazil. The carrier has taken actions to address all of these issues, including a 20% cut in capacity to Brazil later this year.
International PRASM decreased 12% in the second quarter.
Fuel continues to be a bright spot for American. It anticipates an average cost of $1.73 to $1.78 per gallon in the third quarter, which is an at least 40% decrease from the $2.98 per gallon it paid in the third quarter of 2014.
The low fuel expenses are helping drive strong free cash flow that the airline is putting towards $5.4 billion in capital expenditures this year, reducing debt and additional share repurchases.
American’s board of directors has approved a new $2 billion share repurchase programme that will be complete by the end of 2016, says Derek Kerr, chief financial officer of the airline, during the call. This brings the amount of share repurchases approved this year to $4 billion.
In addition, the carrier’s pre-tax margin excluding special items continues to improve with a forecast of 16% to 18% in the third quarter.
Pre-tax margin excluding special items was 17.2% in the second quarter.
“The benefits that airlines continue to reap from lower fuel prices continue to outweigh softer revenue trends, as evidenced by record profitability,” writes Jamie Baker, an analyst at JP Morgan, today.
American reported a $1.92 billion operating profit on $10.8 billion in operating revenue in the second quarter today. Net profit nearly doubled to $1.7 billion.
Analysts, including Baker, continue to emphasise strong airline earnings over PRASM weakness as a sign of health to investors. They cite improving balance sheets as the industry reduces leverage and increases shareholder returns.
Mainline costs per available seat mile (CASM) excluding fuel and special items are less rosy at American. It forecasts a 3% to 5% increase in the third quarter and a 4% to 6% increase for the full year.
This follows a 2.6% increase in system CASM excluding fuel and items during the second quarter.
United also saw a significant rise in CASM excluding fuel and special items in the years following its 2012 integration with Continental Airlines.
American will take delivery of 31 mainline aircraft and 29 regional aircraft in the second half, says Kerr. This will complement plans to remove 53 mainline aircraft and 22 regional aircraft.
The carrier plans to remove four Bombardier CRJ900s from its regional fleet while maintaining deliveries of 25 of the type this year, its investor update shows. A previous update suggested that it had deferred the four aircraft.
Source: Cirium Dashboard
