Rising jet fuel prices could end up being much worse news for American Airlines than its legacy rivals, which may be in a much better position to absorb a prolonged spike in non-controllable costs.
Airline industry analysts are cautioning that American Airlines might feel the pinch from rising oil prices to a much greater extent than the competition. The company’s CEO Doug Parker has repeatedly warned consumers in recent weeks that the trend of higher fuel costs will result in more expensive airline tickets sooner rather than later.
“If indeed this is where fuel prices are going to stay, I would expect you would see higher fares to consumers over time,” Parker told reporters in April. He has since echoed that sentiment ahead of the company’s annual shareholders meeting this month. In public comments, Parker has also indicated that reductions in capacity could be required to allow the airline to financially weather the period of high fuel costs.
Rival carriers certainly are not immune to the effects of climbing oil prices, but Parker’s counterparts at other airlines sound decidedly more optimistic about the future. While American Airlines officials are sounding the alarm about the inevitability of increased ticket prices, Southwest Airlines has been busy offering sale fares for less than $100 roundtrip. At the same time that the AA chief is predicting a steep decrease in capacity, United Airlines has given every indication that the carrier is intent on maintaining an aggressive expansion schedule.
According to Forbes, American Airlines is one of the few U.S. carriers that does not have a policy of hedging against fuel price rises. The policy helped the bottom line at AA over the past few years during which the price of jet fuel dipped to historically low prices, but as the cost of jet fuel climbs, the airline’s profits are especially susceptible to even small price fluctuations in the oil markets.
Meanwhile, The Motley Fool’s Adam Levine-Weinberg points out that American’s already weak balance sheet may be causing the company to feel the pain of increased fuel costs more dramatically than other legacy airlines. Levine-Weinberg notes that already industry-high operating costs and an expensive stock buyback program has left American Airlines in a much poorer position to withstand a sustained fuel cost rise than nearly any other airline.