AMR Turns Profit Again

For the first time in nearly six years, the company has reported two consecutive quarterly profits.
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Updated from 12:24 p.m. EDT

AMR

(AMR)

reported a second consecutive quarterly profit for the first time in nearly six years, but said it nevertheless plans to reduce capacity for the fourth quarter and the coming year.

"The industry has lost $50 billion over five years," CEO Gerard Arpey said Tuesday during a conference call. "We should be cautious about declaring victory because of one or two quarters of profit."

American Airlines, the primary unit of AMR, said it will cut domestic capacity by more than 1% in the fourth quarter, while overall capacity will remain flat. For 2007, the airline plans to cut domestic capacity by more than 1%, with a 1% decrease in overall capacity.

Despite the strength of the U.S. and international economies over the last two years, "the industry did not have the pricing power to offset this enormous problem we've had with fuel," Arpey said. "It points to a capacity problem."

In the third quarter, AMR reported earnings of $114 million, or 45 cents a share, excluding a one-time charge. Revenue was $5.8 billion. Analysts polled by Thomson Financial had expected earnings of 42 cents on revenue of $5.9 billion.

The one-time, noncash $99 million charge reduced the book value of outstanding fuel hedge contracts and amounted to 39 cents a share. In the third quarter of 2005, AMR lost $95 million, or 58 cents a share, including charges.

For the fourth quarter, Arpey said he is "cautiously optimistic" because of the recent drop in fuel prices, 7.7% growth in mainline revenue per available seat mile and bookings that are trending about 1% ahead of last year.

"Fuel remains a wild card, and we continue to watch for the continued effect of the London security event," he said, referring to the August disruption of a terror plot aimed at airlines.

American filled a record 81.7% of its seats during the quarter. Mainline cost per available seat mile, excluding fuel and special items, rose 1% to 7.43 cents. Although the company reduced its projected fuel cost for the second half of the year by $528 million, third-quarter fuel expenses still rose 11.9% to $1.8 billion. AMR's cash and short-term investment balance was $5.5 billion at the end of the quarter.

Asked whether American might follow

Delta Air Lines

(DALRQ)

in its course of rapid international expansion, Arpey said the risk of those routes is a sharp dropoff in traffic after the summer.

"The airline business would be a great business if you just operated in June, July and August," he said.