American, Delta earnings hit hard by high fuel prices

— -- American Airlines parent AMR swung to a third quarter profit thanks to the sale of its money management subsidiary, but excluding one-time accounting items both it and rival Delta reported big third quarter losses.

Like airlines around the globe, American and Delta were hammered this summer by record fuel prices and refining costs. Crude peaked at $147 early in the third quarter, and the so-called "crack spread" — the added cost of turning crude into jet fuel — that historically was less than $10 a barrel reached $70 at one point this summer.

However, a sharp price swing has seen oil prices fall nearly 50% from their summer high. Most of that drop came in September, the last month of the third quarter.

That has given hope to carriers that are cutting costs and reducing capacity so that they may tilt the supply-demand equation back in their favor. Analysts increasingly are forecasting profits for most U.S. carriers in 2009 and are leaving open the possibility of modest profits for some in the fourth quarter. The analysts argue that the huge drop in fuel prices and big capacity cuts are almost certain to outweigh even an historic drop in demand caused by the turmoil in the U.S. and global economies.

American CEO Gerard Arpey noted the importance of the recent drop in crude, which closed Wednesday at $74.54, a 13-month low. But he cautioned that the current economic uncertainty, and what that might mean for travel demand, is a "serious concern." He also warned that it would be "shortsighted to conclude that fuel prices, which remain volatile, are no longer a challenge." In fact, even after the sharp drop in oil prices, American continues to pay more for jet fuel than it paid a year ago because of the wider refining crack spread, he said.

Delta president Ed Bastian said that while "the economic crisis creates uncertainty about the longer-term revenue outlook," the big drop in oil prices "will provide significant savings to us."

Executives at both carriers said that should the economy's struggles lead to an a larger than expected drop off in demand for air travel, they won't hesitate to drop capacity further than already planned in the fourth quarter and in 2009.

American and Delta were the first two carriers in the USA to report their third quarter results. Continental and Southwest will report Thursday, with most others following next week.

Fort Worth-based AMR said it earned $45 million in the third quarter, or 17 cents a share, after accounting for the $432 million sale of its American Beacon Advisors unit and other one-time items. In the third quarter last year it earned $175 million, or 61 cents a share. Excluding one-time items, American's parent lost $360 million, or $1.39 a share, slightly more than the analysts' consensus estimate of $1.39 according to Thomson Reuters.

American's mainline capacity in the fourth quarter will be down 8.3% from a year ago, and its full-year 2009 capacity currently is planned to be down 9% from the carrier's capacity in 2007, the last full year before it began reducing service.

Delta Air Lines, currently still the USA's third biggest airline pending its merger with Northwest, reported a third-quarter net loss of $50 million including special items, or 13 cents a share. That compares to a $220 million profit in the same quarter last year, or 56 cents a share. The Atlanta-based carrier spent $800 million more for fuel year-over-year because of higher jet fuel costs.

Bastian told analysts Wednesday in a conference call that Delta is seeing softening demand for international flights and will "scale back our international growth." Still by year-end Delta's international capacity will be up by at least 13% vs. 2007. It offers more trans-Atlantic flights than any other carrier and is the leading U.S. carrier to the Middle East and Africa.

Domestically, Delta, like most other U.S. carriers, is moving in the opposite direction. By the end of 2008 its domestic flying capacity will by down by as much as 14% compared to 2007.

Delta CEO Richard Anderson said Delta executives and their counterparts at Northwest are confident they will close their proposed merger by December 31. The deal is still awaiting the results of an anti-trust review by the US Department of Justice.