Cheap fuel is a doubled-edged sword for airlines. Low oil prices give airlines extra cash needed to snap up new planes and sketch out new routes. But they can also lead to more seats in the air—which means lower fares.
That’s been part of the problem for American Airlines (AAL) during the first quarter of fiscal year 2016. Due to rival carriers adding more seats and lowering ticket prices, American said Friday that sales fell 4% from the same quarter last year.
The airline posted revenue of $9.43 billion in the first quarter, which also brought earnings per share down from $1.73 in the same period last year to $1.25. Earnings for the three months ending March 31 were also helped by lower fuel costs, which fell 33%. Analysts polled by Thompson Reuters had expected earnings per share of $1.19 on revenue of $9.44 billion.
But a key metric, unit revenue, or how much each customer pays for a mile of travel, fell 7.3%. At the same time, the number of passengers who got on planes rose 1.6% to 46.9 billion.
And some investors are still concerned that fare prices may stay depressed in the long term—especially with pressure from discount rivals.
“Really because of the growth of low-cost carriers, those [pricing] fences have broken down,” CEO Doug Parker, said during the company’s conference call with analysts on Friday, pointing to Spirit Airlines (SAVE) as an example. “More than anything, I think that’s what has driven fares for business travel and for traffic.”
While American Airlines has sold off portions of its fleet in a bid to reduce capacity, cheaper airlines have snapped them up—putting the seats back on the market, analyst Helane Becker from Cowen and Company noted during the call. And that may raise concerns that if oil prices go back up, fare prices won’t match the shift.
Cowen analysts however wrote in a note following the call that American’s first-quarter results were “solid,” and even as fares continued to dip, “the company has a buffer given the selloff in the shares [Thursday].”
In another sign of confidence, American Airlines also launched a $2 billion share buyback program, ending 2017.
American Airlines noted that during the second quarter, the average amount each customer pays for a mile of travel is expected to fall 6% or 8% from the same quarter a year ago. Positive unit-revenue trends are not expected to materialize until next year, said company president Scott Kirby.
