Rising fuel costs are eating into airline profits, dampening expectations for the rest of 2018, and setting the stage for higher fares.
Fuel is the airlines‘ second-biggest expense after labor, so when it rises — at American it was up 40 cents a gallon from a year ago — so does the cost of providing air travel, says American Airlines CEO Doug Parker.
“If indeed this is where fuel prices are going to stay, I would expect you would see higher fares to consumers over time,” Parker said Thursday on a call with analysts and reporters.
American blamed higher fuel prices for a 45 percent drop in first-quarter profit, to $186 million.
The world’s biggest airline cut its forecast of earnings for the year, and shares fell $2.69, or 6 percent, to $42.56 in trading shortly after the opening bell on Wall Street.
American has replaced many of its gas-guzzling older planes with new, more efficient jets over the last several years. Still, fuel spending jumped 26 percent.
The airline burned just over 1 billion gallons in the first quarter, and it paid an average of $2.10 a gallon, up from $1.70 a year earlier. American estimated that it would have saved $412 million — more than offsetting the profit slump — if fuel were still at early-2017 levels.
Fuel prices have crept up even since the first quarter ended March 31. Airlines typically raise fares when fuel gets costlier, although they are not always able to fully recover the higher pump prices.
Parker said he doesn’t think fares will rise fast enough to have much effect on demand for travel, which has been strong. Passenger revenue per mile, which roughly tracks fares and fees, rose 3 percent over the same period last year.
The Fort Worth, Texas-based company said earnings fell from $340 million a year earlier.
Excluding non-repeating items, American Airlines Group Inc. said it would have earned 75 cents per share. That was a penny better than forecast by nine analysts surveyed by Zacks Investment Research.
Revenue rose nearly 6 percent to $10.4 billion.
American cut its forecast of 2018 profit to between $5 and $6 per share, down 50 cents from a January outlook.