The Wall Street Journal
Updated January 25, 2018 1:57 p.m. ET
Tax cuts and buoyant demand led U.S. airlines to strong fourth-quarter profits, but investors are looking warily at plans to add flights while costs are on the rise.
American Airlines Group Inc. intends to expand capacity by as much as 3% in 2018 by adding service to smaller markets and increasing flights to existing destinations. “We’re making existing assets stronger,” Chief Executive Doug Parker said Thursday.
Airlines shares have slumped after United Continental Holdings Inc. on Wednesday outlined plans to boost capacity by up to 6% in each of the next three years. Asked about investor concerns, Mr. Parker defended the industry strategy of using bigger route network to grab market share. “Growing out hubs is just a continuation and perhaps the final phase of [a] maturing business,” he said.
Shares in American and Delta Air Lines Inc.—the nation’s first- and second-largest carriers—slid more than 3% on Thursday, as did Southwest Airlines Co., while United lost more than 4%. The NYSE Arca Airline index declined 2.4%, losing most of its year-to-date gains in the past two days.
Airlines are contending with higher costs as oil prices have risen in recent months to $70 a barrel from $50. American expects its fuel costs to be 24% higher this year, a difference of $1.8 billion for the biggest U.S. airline.
Nonfuel unit costs, the cost to fly a seat a mile, are also on the rise. American expects that metric to climb as much as 5% in the current quarter, based in part on higher pay awarded to its pilots and flight attendants last year. The company expects that growth in nonfuel unit costs to ease over the remainder of 2018.
Southwest also battled higher costs in the fourth quarter. Excluding fuel and employee profit-sharing, its unit costs jumped 4.6% from a year earlier, partly on higher wages and tax-cut bonuses granted to its workers. The airline said Thursday it expects that metric to rise just a half percentage point to 1.5% in the current quarter.
Alaska Air Group Inc.’s overall expenses increased 40% in the fourth quarter, although its nonfuel unit cost rose just 2.2%. JetBlue Airways Corp. said its overall expenses rose more than 16% and its nonfuel unit costs gained 8.1%. American and JetBlue have programs in place to cut costs over time, as does Delta.
Even as costs rise, strong demand and higher fares are bolstering airlines’ top-line results. American on Thursday said its revenue swelled by 8.3% to $10.6 billion, while Southwest’s climbed by 3.9% to $5.27 billion.
U.S. airlines in their quarterly reports said they benefited from changes to U.S. tax law, including the reduction in the corporate rate to 21% from 35%. Southwest, the nation’s fourth-largest carrier by traffic, reported a $1.4 billion noncash credit that reduced its deferred tax liability.
Chief Executive Gary Kelly said the tax cut will make it easier for Southwest to curb costs and execute its growth plan. “I realize there’s angst among some about the growth rate in the industry,” Mr. Kelly said. “One would hope tax reform is at least a floor on travel demand. We’re hopeful it will be a lift.”
JetBlue, the No. 6 carrier, also benefited from the revaluation of its deferred tax liabilities. Alaska, the No. 5 airline, reported a big income boost, reflecting in part a $274 million special tax benefit. Excluding special items, the airline’s results were in line with expectations.
American currently isn’t a cash taxpayer because it has $10.2 billion of federal net-loss carryforwards, which allow it to reduce its tax liabilities on future profits with past losses. The airline said it would book a 24% tax rate this year, mostly noncash.
Delta and United, the third-largest airline, also employ net-loss carryforwards to reduce their tax liabilities. Both have reported fourth-quarter results that beat expectations.
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