Two of the largest US airlines posted sharply stronger quarterly results on Wednesday and said industry-wide capacity reductions and fare increases have bolstered their revenue.
AMR, parent of American Airlines, and discount carrier Southwest Airlines both posted second-quarter results that topped Wall Street's expectations, but also warned that high fuel prices will continue to challenge them for the remainder of the year.
The industry has suffered under the weight of skyrocketing oil prices, which relate directly to the price of jet fuel. Nymex crude oil futures last week notched an all-time high above USD$78 a barrel.
Airlines, however, have fought back, cutting the number of seats for sale and raising ticket prices as they fly fuller planes. American said its load factor was 82.6 percent and Southwest's stood at 78 percent -- both record highs, the companies said.
The second quarter typically is the strongest for airlines as it sees bookings for the peak summer travel season. But some analysts predict robust demand and higher fares continuing past Labor Day.
"Demand remains strong. And with load factors as high as they are, I could see more price increases coming through," said Ray Neidl, analyst at Calyon Securities. "The big bogey here is what oil prices are going to do."
American, posted a second-quarter profit of USD$291 million, compared with a year-earlier profit of USD$58 million.
The company said this was only its second quarter out of the past 22 where it has made a profit without the benefit of special items.
"Our performance indicates very clearly that we are on the right track, but also demonstrates... that we have more work to do to return our company to financial health," Chairman and Chief Executive Gerard Arpey said in a statement.
American reported consolidated revenue of USD$6 billion, an increase of 12.5 percent.
The airline said it paid USD$1.71 billion for fuel in the second quarter, an increase of 26.5 percent over the same period a year ago. The carrier predicted the 2006 average fuel price would be USD$2.18 a gallon. The forecast is up from USD$1.95 a gallon predicted in January.
Southwest, the No. 1 US airline by market value, said net profit rose to USD$333 million from USD$144 million in the same period a year earlier.
Southwest's earnings -- its strongest in six years -- were boosted by gains from its hedging program, which has allowed the airline to secure fuel at more favorable rates than many of its competitors. Southwest said the program generated a cash benefit of USD$225 million in the quarter.
The airline, which said it is 73 percent hedged for the remainder of 2006 at about USD$36 a barrel, expects its fuel costs to be higher than the second-quarter rate of USD$1.42 a gallon and substantially higher than the 95 cents a gallon paid in the third quarter last year.
In the long term, the expiration of some of its hedging contracts will expose the airline to higher costs. Its hedging cover falls to 65 percent in 2007, 38 percent in 2008, and 34 percent in 2009.
"While we cannot control the price of energy, we have insured ourselves with years of price protection that will allow us time to make the necessary changes," Southwest Chief Executive Gary Kelly said.
Given current trends, Kelly said the company should "easily exceed" its goal of increasing earnings by 15 percent for full-year 2006.
He expects these trends to carry forward to next year and set a goal of increasing earnings by an additional 15 percent in 2007 as well. He said the lack of available aircraft was one of the carrier's biggest hurdles to faster growth.
