Heavy business costs erode earnings at American Airlines

Airline carriers across the world have stumbled over the past decade as volatile oil prices ate into their profit margins, prompting a consolidation that has fundamentally altered the sector. Carriers are projected to log profits this year thanks to emphasis on business cost reductions and added fees, but future growth prospects are murky, experts say.

The New York Times reports that airline carriers have successfully found ways to chart profit growth over the past few years after more than a decade of weak travel demand and heightened competition brought the industry to its knees. Even amid a tepid economic climate, airlines are forecast to have their second consecutive profitable year in 2011.

However, not all airlines have fared as well. The number of mergers and acquisitions among carriers has soared over the past few years, but some airlines have failed to participate in the trend – and it is evident in their weak growth and diminished profit margins.

American Airlines, once the mightiest U.S. carrier, is in dire financial straits after it failed to institute an effective business cost reduction program. The airline is mired in debt and announced a drop in quarterly earnings this week, bucking a trend of rising corporate profit margins.

The Dallas, Texas-based company said it lost $162 million in its third fiscal quarter. That figure worried investors, especially as the airline had logged a $143 million net profit in the same period in 2010. Officials contended the drop in earnings resulted from volatile oil prices and a strengthened U.S. dollar. Experts said the airline is failing to overhaul its strategic sourcing of oil unlike other carriers. It also failed to achieve business cost reductions as fuel prices increased 41 percent compared to the third quarter in 2010.

The airline is continuing to chart future growth, however, and officials asserted they are confident the carrier will return to profitability.

"While the third quarter was challenging for American Airlines, we are taking aggressive actions to improve the Company's performance and strengthen its foundation for long-term success," said Gerard Arpey, the chairman of airline parent company AMR. "We have put in place many of the critical building blocks for a successful future, including a strong network and alliance partnerships, accelerated fleet renewal plans and innovative products and services to enhance our customers' experience," he added.