Fuel Lowers American Airlines' Earnings

Strong travel demand pushed up revenue at AMR Corp. in the third quarter, but rising fuel costs continue to take a heavy toll on the Fort Worth-based airline company.

Costs for the third quarter will be up about 14 percent, largely because of high fuel prices, the parent of American Airlines reported in a filing Thursday with the Securities and Exchange Commission. And for the full year, costs will rise about 12 percent, compared with 2004.

The increased costs will likely lead to a steeper-than-expected loss for the fourth quarter and force American to ask unions for more concessions next year, one analyst predicted.

"AMR will almost certainly, in our opinion, need to revisit labor economics in 2006, specifically pension-funding costs," said Jamie Baker, an airline analyst with JP Morgan Securities, in a report to investors.

Airline executives have said they have no plans to request more concessions and are working with labor leaders to cut costs through increased productivity.

"We haven't heard anything [about concessions] from management," said Denny Breslin, an American pilot and union spokesman. "Right now we're exploring every option to save money and create revenue without going back to labor for more."

In the filing, American executives reported that third-quarter revenue should be up as much as 12 percent compared with last year. The airline should also finish the quarter with a hefty cushion of about $3 billion in unrestricted cash.

That will help keep American out of bankruptcy in coming months despite the losses. And the airline is expected to raise $400 million more by the end of the year by issuing bonds backed by a new terminal at John F. Kennedy Airport in New York.

That should give the airline "ample liquidity to make it through the seasonally tough first quarter," Baker said.

American executives said they expect to incur an $80 million charge during the third quarter for a contract termination. That will be partially offset by a $22 million gain from an insurance reserve.

Baker revised his third-quarter estimate from an 85-cent per-share loss to 80 cents, a small improvement. But he widened his loss projection for the fourth quarter and the full year. He had forecast a $1.20 loss for the quarter and $3.07 for the year; now he expects AMR to lose $2.60 per share during the fourth quarter and $4.42 per share for the year.

Still, he noted, "AMR's liquidity and revenue performance continues to substantially exceed that of its peers," he said.

AMR's stock rose Thursday, likely on the strong revenue and liquidity news from its filing.

Shares (ticker: AMR) gained 72 cents, or about 7 percent, to close at $11.04 per share.

American was not alone in reporting strong summer revenues. A report by the Air Transport Association indicated that passenger revenues in August rose 7 percent industrywide.

"We could see this positive revenue trend continue into the fall," said Michael Linenberg, an airline analyst with Merrill Lynch, in a report.

Fort Worth Star Telegram

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