The airline industry’s attempts to get a recovery going this spring may have caught the flu.
On one hand, the top executives of Southwest Airlines Co. and AMR Corp., parent of American Airlines Inc., said they don’t see any signs that the traffic demand is deteriorating as 2009 progresses.
However, the scare over swine flu has hurt their traffic and clouded their ability to assess how things are looking for the next few months, they said.
“I feel about the way we felt at the end of the first quarter – that things aren’t getting worse but they’re certainly not getting a lot better,” AMR chairman and chief executive Gerard Arpey said after AMR’s annual meeting.
That’s what Arpey and AMR chief financial officer Tom Horton had told investment analysts in April as they reviewed AMR’s $375 million first-quarter loss.
“Since then,” Arpey said Wednesday, “we’ve had the effects of the H1 virus, which has had a devastating effect on our service to Mexico and a not-insignificant effect elsewhere. So I think with the H1 virus, it’s been hard to tell what’s going on with traffic.”
Even though American and American Eagle cut their U.S.-Mexico capacity by about one-third, “our load factors are still very poor into the Mexico market,” he said.
Gary Kelly, Southwest’s chairman and chief executive, told shareholders Wednesday that while April revenues improved, “May revenues are very soft.”
Afterward, he called April’s better results “a feint,” boosted by Easter travel during the month. May’s traffic and revenue are undoubtedly being hurt by the concern over swine flu, he said, even though Southwest has no flights to Mexico.
“You could definitely see an impact on bookings and revenue trends once the news really picked up about the flu,” Kelly said. “I’m not ready to suggest we’ve seen a bounce-back from that time period yet.”
He noted that May is “a shoulder month,” between the slow winter travel period and before summer traffic usually starts filling airplanes.
“School is just now getting out. We’ve got Memorial [Day] weekend coming up. June is typically our strongest month of the year. June will tell us a lot,” Kelly said.
Kelly said Southwest is having to put a greater emphasis on discounted fares as it waits for higher-fare business travel to pick back up. For consumers, that means low fares for months to come.
“We’re preparing for a sustained recessionary environment where low fares will be needed and will carry the day,” he said. “Our low-fare strategy has been working in the sense that we have a party and people show up.”
Although fares may be down, the carrier filled a record percentage of its seats in the first quarter and in April, he said, and it might set a record for the second quarter.
“The only curveball is the flu, which has impacted some of the volumes. But even having said that, it looks like we’ve got pretty full airlines,” Kelly said. “That will be our strategy for now.”
At last year’s annual meetings, the carriers were talking about the record-high oil prices that were threatening their companies and the airline industry. At the time, a barrel of crude oil was passing $125 on its way to a high of $147 in July.
In the latter part of 2008, oil prices collapsed even faster than they rose, falling into the low $30s a barrel in December. But they’ve since climbed back, hitting $60 recently.
Both Kelly and Arpey said they are as concerned about the volatility in the price of oil as the price itself.
Kelly said he doesn’t have any insight into where fuel prices are headed. “To be honest, I’m quite surprised that we’re around $60 a barrel, given that the fundamentals are so weak,” he said. “But they are there, and we’ll have to manage accordingly.”
Arpey said that “by historic standards, oil prices are high right now,” noting that jet fuel cost 70 cents to 80 cents a gallon when he became chief executive in 2003. By comparison, American’s average price for fuel in the first quarter was $1.91 a gallon – much less than the $3.57 per gallon average in third-quarter 2008, but still above the average spent in recent years.
“What I hear from my oil executive colleagues is that the supply of oil in the world does not explain prices at this level, let alone the levels that were reached last year,” Arpey said.
Kelly said he “wouldn’t put a limit” on where oil prices will go.
“I’ve heard people say we’re headed back to $200 a barrel, and I don’t know why that would be an unreasonable prediction,” he said. “We can’t predict what prices will be. All we can do is prepare for high prices.”