Friday, October 18, 2013

AMR Swings to Profit on Lower Costs, Record Revenue -- Government Shutdown Doesn't Seem to be Sapping Travel Demand: CEO

By  Susan Carey and  Ben Fox Rubin

The Wall Street Journal

Updated Oct. 17, 2013 11:31 a.m. ET

American Airlines parent AMR Corp.  swung to a third-quarter profit on record revenue and cost savings achieved in its bankruptcy restructuring, and doesn't see much effect on travel demand due to the government shutdown that just ended.

AMR Chief Executive Tom Horton said in an interview Thursday that bookings in the current quarter "appear to be quite strong," compared with the level achieved at this time a year ago. "Demand for travel is outpacing our capacity increases, which is good news."

While he said the nation's third-largest airline by traffic continues to keep an eye on the effects of the government shutdown, oil prices "have been fairly tame" and the industry "has been disciplined with respect to the supply and demand balance." This is leading to a fourth-quarter outlook about which "we feel pretty good," Mr. Horton said.

The Fort Worth, Texas, company posted net income of $289 million, compared with a year-ago net loss of $238 million. But if $241 million in special items related to its bankruptcy reorganization, financings and expenses related to its pending merger with US Airways Group Inc. are stripped out, the latest quarterly profit would have been $530 million, a company record. A year ago, AMR reported a profit of $110 million, excluding $348 million for such items.

AMR, which hopes to leave its nearly two-year stay in bankruptcy-court protection via a merger with US Airways, first must prevail in an antitrust trial slated to begin on Nov. 25. The Justice Department in August sued the companies to stop the combination, contending it would drive up ticket prices and deprive consumers of choices in air travel. The airlines disagree, saying the combination—which would form the largest U.S. airline by traffic—would give fliers new choices and act as a counterweight against United Continental Holdings Inc. and Delta Air Lines Inc., two carriers that recently bulked up through mergers.

Several state attorneys general joined the Justice Department in the complaint. Mr. Horton said the airlines "are talking" to them in the hopes of changing their minds. The Texas attorney general recently withdrew his opposition, something Mr. Horton said was "the result of a lot of hard work."

More than 60 Democratic members of Congress recently wrote President Barack Obama to show their support for the combination. "I don't know what helps and what doesn't," the CEO said of that letter. "But there is overwhelming support for the merger."

Until the trial is over, AMR must remain in bankruptcy-court protection, which is costing it about $50 million per quarter in professional fees. "It's a lot of money, which is why we think it's important to get the company out of restructuring as soon as possible," Mr. Horton said. Moreover, some vendor and supplier contracts that were redone in the bankruptcy case to reduce costs won't kick in until AMR leaves Chapter 11, he said. If AMR and US Airways lose at trial, the larger carrier is expected to have to craft a new plan or reorganization and poll its creditors on their support before it can emerge.

AMR said it expects to increase its fourth-quarter capacity by 3.5% year-over-year. Much of that growth will come from flying its planes longer distances and by adding new destinations in Latin America and Asia. For the full year, capacity is expected to increase just 1.5% compared with all of 2012.

Revenue in the third quarter was $6.83 billion, up 6.2% from a year ago and marking the highest quarterly revenue figure in the company's history. Unit revenue, a key metric of the amount of money taken in for each passenger flown a mile, rose 3.4% in the quarter, compared with a year earlier, and reached a company record. AMR said it filled 84% of its seats. The quarter was the seventh consecutive three-month period in which the company improved its pretax margins.

Consolidated unit costs, excluding fuel and special items, were down 5%, primarily driven by AMR's restructuring efforts.

AMR is the first U.S. airline to report its third-quarter results. Other carriers will release their numbers in the coming days and the general expectation is for strong profits, based on robust unit revenue gains for most of them and the fact that the third quarter seasonally is the strongest of the year.


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