BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

American Airlines Expects To Save $5 Billion From Tumbling Oil Prices

This article is more than 9 years old.

American Airlines Group said on Tuesday it expects to save $5 billion over the course of 2015 as a result of tumbling oil prices, and indicated that fuel cost savings may give the world's largest airline extra financial firepower for aircraft orders, capital expenditure and debt repayment.

Unlike other U.S. carriers such as Delta Air Lines , Southwest Airlines and United Continental Holdings , American doesn't hedge its fuel costs, meaning that a tumble in price of oil from over $100 a barrel to below $50 a barrel is boosting the airline's bottom line. "We are seeing a substantial benefit from the drop in fuel prices," CEO Douglas Parker said on a call with analysts.

Parker estimated the total benefit to be $5 billion for 2015, given American's expectations that its fuel costs will range from between $1.71-to-$1.81 a gallon through the course of the year. He also noted that American expects to primarily use fuel savings to accelerate aircraft orders given the likelihood of better financing terms and the long-term benefits of revamping the carrier's fleet. Money left over, Parker said, would be returned to shareholders.

"It is definitely in our shareholders interest to invest," Parker told analysts of American's planned aircraft spending. But, he said there should be cash leftover for shareholders given a dramatically falling expense line. "That cash is yours and we will look to get that back to you in the most efficient way possible," Parker said. American believed its stock was undervalued in the fourth quarter, driving share repurchase activity, he added.

American also said it doesn't expect to begin hedging fuel costs in the foreseeable future given a contango in oil markets, where prices of oil futures are sharply higher than spot prices.

Falling oil prices normally come with declining economic activity in the U.S., as they did in the Great Recession. However, American believes the recent tumble in oil is supply driven, rather than demand driven. Those expectations mean American could see a sustainable benefit from commodity prices; falling expenses just as demand stays high and helps the airline maintain prices.

Those benefits come as American continues to integrate its acquisition of U.S. Airways, a transformation deal that propelled the company out of bankruptcy and made it the world's largest airline.

In the fourth quarter, forecasting issues and rising competition in a few domestic markets caused American to fall short of some analyst expectations.

In the fourth quarter, net profit excluding net special charges was a record $1.1 billion, or $1.52 per diluted share, a 153% improvement from the prior year. Revenue in the fourth quarter was $10.2 billion, an 2.1% increase from a year-ago on on a 1.7% increase in total available seat miles (ASMs).

Consolidated passenger revenue per ASM (PRASM) was 13.50 cents, a 1.0% from year-ago levels that surprised analysts to the downside. When pressed by analysts, American blamed that PRASM miss on its integration with U.S. Airways and capacity increased in four of its domestic markets.

Fuel costs in the quarter fell 17.3%, helping to drive a record 10.6% pre-tax margin. For 2015, American expects pre-tax margin to be in a range of 13%-to-15%.

American authorized a $2 billion share repurchase program to be completed by the end of 2016, and declared a 10-cent dividend.

Shares in the airline were falling nearly 3% in early trading.