American Feeling Pressure on Costs
American Airlines is facing more cost head winds this year -- and not just from the rising price of jet fuel, executives said Thursday.
Non-fuel-related costs are expected to rise by $600 million this year, stemming from increases in the price of employee medical care, airport fees and debt expenses, Beverly Goulet, the airline's treasurer and vice president of corporate development, told analysts at a New York airline conference.
And American's cost advantage over its major hub rivals like United Airlines and Delta Air Lines has been slipping away as those carriers restructure in bankruptcy court, she said.
"It's still unclear where we will wind up competitively with so many of our competitors restructuring in Chapter 11," she said.
That means the airline must persist in its 5-year-old drive to improve efficiency and cut costs. American executives say they've identified $700 million in expenses that can be cut this year. In 2005, the airline's total operating expenses were $21 billion.
Excluding fuel, she said, "unit costs will be consistent with last year."
Still, with American estimating an 11 percent rise in fuel prices in 2006, "flat costs aren't going to cut it," Goulet said.
She also pointed to American's rising debt burden as a problem that must be dealt with in coming years. American's debt stands at a record $20 billion.
"That's a situation that must be rectified," she said.
Revenues also must be boosted before American can return to financial stability, she said.
Higher fares have helped the industry this year. In January, for example, average fares were up nearly 9 percent on domestic flights compared with January 2005, according to the Air Transport Association.
Earlier this week, even discount king Southwest Airlines said that it will likely raise fares this year to cope with rising fuel costs.
But higher fares aren't the only solution, Goulet said. She noted that American has also enhanced its revenues by selling lifetime Admirals Club memberships, charging for food aboard flights and selling last-minute first-class upgrades.
"Finding new sources of revenue is particularly important," she said.
Despite the warnings, airline analyst Ray Neidl said Thursday that he believes that the industry overall will break even this year, despite the high cost of fuel.
"The current environment seems to reflect positive trends," he told investors in a report.
Excluding bankrupt carriers Delta Air Lines and Northwest Airlines, the industry could make a profit of $2.3 billion this year, he said.
Shares of AMR Corp. (ticker: AMR), American's parent, rose 4 cents to close at $25.87 per share in trading Thursday.
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