Economics Internal Assesment

Cost of Fuel Hurts Profits at US Air and United
By REUTERS
Published: July 21, 2011

United Continental Holdings and the US Airways Group posted weaker profits on Thursday, hit by higher fuel costs amid a murky outlook for travel demand.
The results for the two airlines topped Wall Street expectations, but the surprises were not enough to offset weakness perceived among analysts, which theyattributed to increased fuel prices.
“Revenues are going up, but costs are really, really up there. And that’s because of fuel,” said Helane Becker, an airline analyst with Dahlman Rose & Company.
She said travel bookings could be weaker in the second half of the year as economic weakness hampers the United States.
American Airlines on Wednesday reported a larger-than-expected loss, incontrast with the profits of its peers.
United Continental, formed from the 2010 union of United Airlines and Continental Airlines, said second-quarter net profit fell to $538 million, or $1.39 a share, from $611 million, or $1.57 a share, in the period a year earlier when the companies were still separate. Excluding one-time items, the company earned $1.49 a share, compared with Wall Streetforecasts for $1.43.
Revenue rose 10.3 percent, to $9.81 billion, while fuel costs rose 30.2 percent, to $3.23 billion.
On a conference call with analysts and reporters, United Continental executives predicted demand for travel in the second half of 2011 would be consistent with that of the first half despite signs of a stalling economic recovery.
“With significant uncertainties here and abroad, wehave responded appropriately, raising fares in the face of high fuel cost and reducing our planned capacity to reflect the challenging environment that we face,” said Jeff Smisek, United Continental’s chief executive.
After the March 11 earthquake and tsunami in Japan, United Continental reduced capacity by 11.8 percent on Japanese routes because of weaker travel demand. The cuts erodedsecond-quarter unit revenue by $100 million.
Second-quarter earnings at US Airways were $92 million, or 49 cents a share, compared with $279 million, or $1.41 a share, in the quarter a year earlier.
Excluding special charges, US Airways earned 56 cents a share, beating a Wall Street consensus forecast for 53 cents per share.
Revenue at US Airways rose 10.5 percent, to $3.5 billion. Its fuel bill rose 53.8percent, to $948 million.
Scott Kirby, president of US Airways, said on a conference call with analysts and reporters that while the bookings outlook is uncertain, demand is solid.
“We continue to see an unusually volatile environment for bookings,” Mr. Kirby said, noting the negative impact of political upheaval and natural disasters.http://www.nytimes.com/2011/07/22/business/united-and-us-airways-hurt-by-high-fuel-costs.html?_r=1&ref=gasolineprices
Commentary:
This article explains how the cost of fuel hurts and pulls down profits at US Airway Groups and United Continental Holdings. These, have appeared to have weaker profits in consequence of high fuel cost, so travel demand also decreases but not in great scale as these companies show they can manage such situations in avery effective way. This was done by United Continental as they reduced their capacity for about 11.8 percent on Japanese routs because of weaker travel demand caused by the disastrous recent earthquake and tsunami on March 11th.
The price in fuel changes constantly increases some couple of months and decreases for other times, they can increase 50 percent in a year. Very importantly, thedemand for fuel is inelastic in response to price changes in the short run as happened in this case with US Air and United. This is mainly because fuel is an essential input into many production processes such as in these companies, that is to say without fuel plains can’t function at all. Although this is different in the long run, as it becomes more elastic if non-fuel substitutes are developed,...