Passenger Numbers Decline Still Leading Capacity Cuts Two-To-One

As passenger numbers continue to drop, two major airlines posted record quarterly losses last week – despite a drop in costs per seat mile, due to falling jet fuel prices.

American Airlines’ parent company AMR Corp. posted a $375 million Q1 loss on Wednesday. Although the figure sounds immense, it is some $25 million less than was expected. The stock market responded quite positively to the news, driving shares in AMR up to the highest levels since October 2008 in midday trading.

As ANN reported, American also told 4,800 of its line employees it would delay planned layoffs next month, on the belief that stronger traffic numbers this summer will justify their services. "The struggling economy and capital markets remain significant challenges for American and the rest of the industry," said AMR CEO Gerard Arpey. "Our 2009 outlook remains challenging."

The very next day Southwest Airlines’ announcement followed, reporting a $91 million deficit during Q1. "Our first quarter 2009 financial results are disappointing, but not surprising given the current economic environment," said Southwest CEO Gary Kelly.

"We face the toughest revenue environment in our history. A rapid weakening in passenger demand during first quarter, particularly among business travelers, led to our first quarter net loss. Although competitively strong and financially resilient, we are not immune to the challenges the worldwide recession is having on air travel."

Kelly said Southwest will suspend all further plans to grow capacity, past last week's announcement of the start of service into Boston; increased service on new or existing routes will come at the expense of decreased service on others.

Although airlines’ recent fuel hedges have tended to backfire due to falling fuel prices, Forbes reports both SWA and AAL are actively establishing hedges while fuel prices are low, and expecting Q2 fuel costs to remain in line with Q1.

That said, the deciding factor over future profits and losses likely resides in passenger numbers, as Q1 stats showed decreases in passenger traffic still outpacing capacity cuts two-to-one. AMR CEO Gerard Arpey said, "Our 2009 outlook remains challenging."

FMI: www.aa.com, www.southwest.com