AMR, Southwest CEOs worried by fuel, labor costs

May 18, 2011 - 6:59 PM

DALLAS (AP) — Southwest and American are airlines heading in different directions financially, and that was clear from the questions thrown at their CEOs during annual shareholder meetings Wednesday.

Gerard Arpey, the CEO of American Airlines parent AMR Corp., was grilled about his $5.2 million compensation package and contract negotiations with union workers that have dragged on for years. He also had to defend his strategy for turning around a company that has lost $4.5 billion since 2008.

At the Southwest Airlines Co. meeting, one shareholder politely — almost apologetically — asked Gary Kelly if the company might ever raise its dividend. Another took several minutes to thank him for Southwest service in Detroit.

Wall Street has treated the two airlines differently as well. While not the industry's best-performing stock, Southwest shares have risen 7.3 percent since the start of 2010. AMR shares have dropped 14.9 percent.

Low-cost airlines such as Southwest have undercut rivals on fares and taken a greater share of the customers. Southwest's first-quarter passenger traffic soared 11.9 percent over year-ago levels. That helped it boost revenue by 18 percent and scratch out a $5 million profit despite surging jet fuel prices. Consistent profits also gave Southwest the financial strength to buy AirTran Airways for $1 billion, while American missed out on the merger mania gripping the airline industry.

Southwest's four biggest rivals, however, lost a combined $1.1 billion in the first three months of this year. The biggest loss, $436 million, belonged to AMR. American's passenger traffic grew a meager 1.6 percent, though revenue grew 9 percent thanks to higher fares. American remains saddled by high costs and heavy debt after years of huge losses. Analysts have questioned whether management has any good ideas to fix the company.

Arpey's strategy includes new partnerships with British Airways and Japan Airlines that should boost revenue from international travel, where it competes with Delta and United. He's also keenly focusing American's domestic routes on five big markets including New York and Los Angeles. And he wants to control labor costs.

"It is no secret that the biggest challenge we face financially speaking is the fact that our labor costs are the highest in the industry," Arpey said.

Labor accounts for 31.3 percent of all operating costs at AMR, but only 22.9 percent at Delta and 22.5 percent at United and Continental.

American's three labor unions have been seeking pay raises for three years. On Wednesday, a few dozen employees picketed outside the meeting, while inside union members criticized Arpey for getting bonuses and an increase in the value of his compensation package.

One thing Kelly and Arpey share is a difficult job dealing with fuel costs that are about one-third higher than a year ago.

Southwest, however, expects to catch a break from a drop in oil prices — they're down 12 percent this month. The company said Wednesday it expects fuel 2011 costs to rise $1.3 billion above last year's $3.62 billion tab. It had been forecasting a $1.5 billion jump.

Demand has been strong enough for airlines to raise prices about a half-dozen times this year. Kelly said despite higher fares, bookings for May and June look strong.

Arpey echoed that. Heading into the busy summer travel season, "We have good reason to be cautiously optimistic," he said.

Neither CEO offered predictions about profits and losses. Analysts expect AMR to lose nearly $700 million this year and for Southwest to post net income of nearly $500 million, according to FactSet.

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Business writer Alex Veiga in Los Angeles contributed to this report. Koenig can be reached at http://twitter.com/airlinewriter