RockBottom

American Air boss contends fares too cheap

Airline may see profit despite high fuel costs

Bank Rate Monitor
By Mark Skertic, Tribune staff reporter. Tribune staff reporter Ameet Sachdev contributed to this report

May 25, 2006

Demand for air travel continues to grow, and it shows no sign of slowing despite rising fares, the leader of American Airlines said Wednesday.

American, the country's largest airline, set a record last year when its planes were 78.6 percent full, and it is on pace to break that mark this year, said Gerard Arpey, chairman and chief executive of AMR Corp., American's parent.

Arpey bristled when asked if travelers were likely to balk at ticket prices that have risen by $5 and $10 increments in recent months. The industry needs to charge more for its services, he said.

"Fares have been too low; that's why the industry has lost billions and billions of dollars. That cannot go on," he said following an address to the Executives' Club of Chicago.

"Oil has gone from 10 cents from every dollar of our revenue to 30," he said. "You can't go on charging less than it costs you to produce your product. To a certain extent, airline customers have had a pretty good ride for the past five years."

The Ft. Worth-based carrier believes it is on the cusp of turning around annual losses.

"If Wall Street's current forecast is correct, this may be our most profitable year in over five years," Arpey said during his speech. "Our hard-earned progress is gratifying, but with no fuel relief in sight, it is also very fragile."

Fuel costs have tripled in recent years, wiping out profit margins and forcing some carriers to file for bankruptcy protection. United Airlines recently emerged from Chapter 11, while Delta Air Lines and Northwest Airlines have operated in bankruptcy since September.

American has lost more than $8 billion in recent years. Its long-term debt also has continued to climb, to $12.5 billion, according to the company's recent report to federal regulators.

Those losses have forced difficult decisions, including holding off orders for new planes. There are international routes American might add, but with about 1,000 aircraft in its fleet, it must first find the most efficient way to use what it has and chip away at its debt, Arpey said.

With no orders in place, it may be a while before the carrier can get new planes. Delivery slots for Boeing Co.'s 787, which is under development, are sold out through early 2011, said Mike Bair, vice president and general manager of the 787 program. The longer American puts off buying new airplanes, the longer it will have to wait for one of the industry's most-sought-after models.

Officials at the Chicago-based company have said that they expect the major domestic carriers to start ordering new planes later this year or in early 2007.

"We've got to take those 1,000 airplanes and drive them to a sufficient level of profitability so we can order more airplanes and fly to more international destinations," he told members of the audience.

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av8r4aa

When the airfare is that cheap that you have nearly 100 % occupancy,
something is definately wrong.
A full airplane only tells me one thing.
YOU DID NOT CHARGE ENOUGH!

These passengers spend more on Starbucks and filling up their Hummer
than they do on a a airplane ticket.

Its the same shopping frenzy that retail business have.

When a customer sees a incredible deal on something.
THEY WILL PURCHASE IT!!!!!!!

Does not matter if its a sale at Sears on Dirt cheap airfare.

Bargains do not last long.

Basically the airlines are selling dollar bills for 95 cents,
and asking the rank and file to contribute the difference.

Absolute Bull$hit

captfudd

Arpey is doing something right.

XtremeF150

Anyone with a little business savy should know if you are operating at near capacity and still not making out of the red and into the black then you might want to think about raising costs....even if it means losing a few customers or even planes, at least the remaining planes are turning a profit.....Wait, isn't that why you run a business in the first place?

XtremeF150

BoilerUP

Just a couple months ago I got 2 tickets on American IND-COS roundtrip for my honeymoon at $200 apiece. Connected through DFW both ways. All four segments were mostly full.

Arpey is exactly right, be he might look towards his own company first before he starts blaming other companies...

tomgoodman

"Deja Vu all over again" Several years ago, Bob Crandall said it would be useless to remove seats and give the pax more legroom, because they would just flock to a crowded competitor who charged a few bucks less. A while later AMR tried it anyway, lost money, and replaced the seats.
Passengers SAY they will pay more for better service, but their actions say otherwise. I see only three ways to raise fares: a) Re-regulation, b) Limited anti-trust immunity, or c) A big reduction in available seats. Unfortunately, all of these have serious drawbacks.

BoilerUP

One thing I will say though about my trip...I used to work for American Connection and after my 14 months there *hated* everything AMR. I've flown AA a couple times recently and IMO customer service has gone up exponentially in the last 3 years. It seems they are trying to "do things right" over there, and I definately wish them luck.

Drahcir1

Why is it that Airlines are "afraid of raising airfares" they bs of raising 5 or 10 dollars is not enough raise it 50 dollars and the planes will still be oversold garuanteed!

MikeB525

Heres my $0.02 on raising fares: Do it!

Heres the way I figure it:

1. You figure if you have an airplane that seats 150 people (lets just assume and all-coach cabin), raising the fair by a little will still give you a good bit of extra money. A $10 increase (lets just assume a one-way trip) will mean an additional $1500 in revenue collected for that flight. A $15 increase will give you $2250 in additional revenue. Might be just enough to turn a profit on that particular flight.

2. ALOT of people won't notice the increase. Alot of people who fly don't do it often; maybe once every couple years. They may not notice that the fares have "increased" and in most caes they'll still be able to afford it.

3. ALOT of the people who fly very frequently are business travelers, so their airfare is paid for by their company. Also, they often book on very short notice, so you get alot of revenue from them (they also very often do business or first class).

4. Good economy and passenger acceptance/demand: Some articles I've seen recently say that passenger demand is still very very high for this summer and it even says that passengers are understanding of the higher fares, and accept them. As for pax always looking for the cheapest rates, perhaps not always. I have a good friend who recently flew on JetBlue but says she still prefers Continental, even though they may be slightly more expensive.

Just like Drahcir1 said: even if you raise the fare a little, you'll probably still fill the airplane.

B757200ER

Arpey is RIGHT----RAISE the fares NOW.

Look at airports: check-in counters, security lines, gate boarding areas, restaurant lines, full flights and the like. They are ALL overwhelmed with passengers who are flying. Flying from A to B costs money, and airlines are not non-profit organizations.

Raise those fares. Airlines are in business to turn a profit.