American Airlines Posts Impressive Profits for 2015
Photo courtesy of American Airlines
American Airlines has announced what everyone already expected to hear: thanks to a very healthy fourth quarter, the airline, which is now the largest in the world, posted substantial profits in 2015.
Better than expected
During the fourth quarter, American earned $3.28 billion. Investors were understandably happy with this total. Analysts had projected that AA’s earnings per share would be about $1.97. This is already an impressive number, especially given that AA was on the edge of bankruptcy only a few short years ago. When all was said and done, however, the earnings per share came to an even $2.
For the entire year, the airline posted total gains of $7.6 billion, or $6.3 billion when so-called special items (one-off profits) were not counted. That was a big enough total to inspire CEO Doug Parker to brag a little bit. He told investors during a conference call: "we knocked it out of the park."
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American benefits from not hedging its bets
The profits were mainly due to fuel prices that were more than 40 percent lower than they were in previous years. American fared even better than some of its competitors because it decided not to heavily invest in fuel futures. This hedging strategy worked well for airlines like Southwest when oil prices were sky high. However, it hurts them now because their futures contracts make it so that they cannot fully take advantage of the massive drop in crude prices like American can.
American’s CFO, Derrick Kerr, admitted as much during a conference call announcing the earnings. "We have directly benefited from lower fuel prices due to our lack of fuel hedges… [and] we expect to see another year with significant fuel savings.” According to USA Today, projections for 2016 suggest that the price per gallon for jet fuel will stay below $1.30.
What does this mean for fliers?
Investors and American’s executives were probably all very happy with the better-than-expected profits. Some of the airline's employees have already felt the benefits of the past years’ successes. American Airlines pilots got a substantial raise last year and just saw another three percent pay bump on Jan 1.
But what about fliers? Profits and low fuel prices will allow American to compete with budget carriers on certain routes. However, fliers should not expect fares to become universally cheaper in 2016.
American can use continued low gas prices to compete with low cost carriers like Southwest, its main rival in the Dallas area (where both airlines are headquartered). The airline may also begin offering no-frills fares on regular flights to better compete with ultra-budget carriers like Spirit. However, like other legacy airlines, AA probably won't be dropping fares on routes that do not have stiff competition.
American Airlines has put itself in a good position to compete in 2016. However, it will have to find a balance between keeping investors happy and offering fares to appease fliers who might be inclined to choose low cost carriers if it will save them a few dollars.
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