Airline Pilot Central Forums - AA costs going up, not just over fuel

American faces cost hikes on more than just fuel
ADVANTAGE OVER BANKRUPT RIVALS WANES
By Trebor Banstetter
Knight Ridder

FORT WORTH - American Airlines is facing more cost head winds this year -- and not just from the rising price of jet fuel, executives said Thursday.

Non-fuel-related costs are expected to rise by $600 million this year, stemming from increases in the price of employee medical care, airport fees and debt expenses, Beverly Goulet, the airline's vice president of corporate development and treasurer, told analysts at a New York airline conference.

And American's cost advantage over major hub rivals United Airlines and Delta Air Lines has been slipping away as those carriers restructure in bankruptcy court, she said. ``It's still unclear where we will wind up competitively with so many of our competitors restructuring in Chapter 11,'' she said.

That means the airline must persist in its drive to improve efficiency and cut costs, an ongoing effort for the past five years. American executives say they've identified $700 million in expenses that can be cut this year. In 2005, the airline's total operating expenses were $21 billion.

Excluding fuel, Goulet said, ``unit costs will be consistent with last year.''

Still, with American estimating an 11 percent rise in fuel prices in 2006, ``flat costs aren't going to cut it,'' she added.

She also pointed to American's rising debt burden -- now a record $20 billion -- as a problem that must be dealt with in coming years. ``That's a situation that must be rectified,'' she said.

Revenue also must be boosted before American can return to financial stability, she said.

Higher fares have helped the industry this year. In January, average fares were up nearly 9 percent on domestic flights compared with January 2005, according to the Air Transport Association.

Earlier this week, even discount carriers Southwest Airlines and JetBlue Airways said they will probably raise fares this year to cope with rising fuel costs.

But higher fares aren't the only solution, Goulet warned. She noted that American has also enhanced revenue by selling lifetime Admirals Club memberships, charging for food on board flights and selling last-minute first-class upgrades.

``Finding new sources of revenue is particularly important,'' she said.

Despite the warnings, airline analyst Ray Neidl said Thursday he believes the industry overall will break even this year, despite fuel costs.

``The current environment seems to reflect positive trends,'' he told investors in a report. Excluding bankrupt carriers Delta Air Lines and Northwest Airlines, the industry could make a profit of $2.3 billion this year, he said.

Shares of AMR, American's parent, rose 4 cents to close at $25.87 a share in trading Thursday.