Airlines Reap Benefits of High Travel Demand, Tax Cuts
AAL -2.24% Tax cuts and buoyant demand led U.S. airlines to strong fourth-quarter profits, but investors looked warily at plans to add flights while costs are rising.
American Airlines Group Inc. AAL -2.24% intends to expand capacity up to 3% in 2018 by adding flights to smaller markets and more flights to existing destinations. “We’re making existing assets stronger,” said Chief Executive Doug Parker. Asked about United Continental Holdings Inc.’splans to boost capacity by up to 6% in each of the next three years, which touched off airline share losses this week, Mr. Parker defended the industry strategy to use a bigger route network to grab market share.
“Growing out hubs is just a continuation and perhaps the final phase of [a] maturing business,” he said.
Shares in American, Southwest Airlines Co. , Delta Air Lines Inc. and United all dropped around 3% on Thursday. Alaska Air Group Inc.’s stock dropped 7%. The NYSE Arca Airline index has lost almost all of its year-to-date gains over the past two days, and was recently down 2.2%.
Airlines are contending with higher costs as fuel prices have risen in recent months to $70 a barrel from $50. American expects fuel costs to be 24% higher this year than last, a difference of $1.8 billion for the biggest U.S. airline.
Nonfuel unit costs, the cost to fly a seat a mile, also are running higher. American expects that metric to rise by up to 5% in the current quarter, based in part on higher pay for its pilots and flight attendants awarded last year. The company expects that growth in nonfuel unit costs to slow down for the remainder of 2018.
Southwest also battled higher costs in the fourth quarter. Excluding fuel and employee profit-sharing, its unit costs jumped 4.6%, partly on higher wages and the tax-cut bonuses to its workers. The airline expects that metric to rise just 0.5% to 1.5% in the current quarter.
Alaska’s overall expenses rose 40% in the fourth quarter, although its nonfuel unit cost edged up by only 2.2% year over year. JetBlue’s overall expenses rose 16.5% and its nonfuel unit costs gained 8.1%. American and JetBlue have programs in place to cut costs over time, as does Delta.
Despite rising costs, revenue at many airlines topped expectations in the fourth quarter. American, based in Fort Worth, Texas, said its fourth-quarter revenue swelled by 8.3% to $10.6 billion. Southwest’s fourth-quarter revenue climbed by 3.9% to $5.27 billion.
U.S. airlines also said they benefited from changes to U.S. tax law, including the new 21% corporate rate, down from the previous 35% rate. Southwest, the nation’s fourth-largest carrier by traffic, benefited from a $1.4 billion noncash credit that reduced its deferred tax liability.
“Based on our current outlook, the reduction in the statutory federal rate will result in hundreds of millions in tax savings, which will significantly boost our earnings in 2018,” said Southwest Chief Executive Gary Kelly. Like many of its peers, Southwest used some of the savings to give employees a one-time cash bonus of $1,000.
JetBlue, the No. 6 carrier, also benefited from the revaluation of its deferred tax liabilities. Alaska’s big income boost was due in part to a $274 million special tax benefit. Excluding special items, Alaska’s results were in line with expectations.
American isn’t a cash taxpayer because it has $10.2 billion of federal net-loss carryforwards, which allow it to reduce its tax liabilities on future profits with past losses. The airline said it would book a 24% tax rate this year, mostly noncash.
Delta and United also employ net-loss carryforwards to reduce their tax liabilities.
—Doug Cameron contributed to this article.
Write to Susan Carey at susan.carey@wsj.com