Dear Fellow Employee:
Today we reported a second quarter loss of $284 million, excluding the special non-cash charge reflecting the write down of some of our aircraft and routes that I discussed in my letter of two weeks ago. This result compares very unfavorably to the $317 million profit we earned during the same period a year ago. It's certainly no mystery to anyone how our results could deteriorate so dramatically from one year to the next - since our roughly $600 million drop in earnings coincided with a fuel cost increase of well over $800 million.
When taken out of context, our revenue performance during the second quarter was actually reasonably good. On the strength of full planes (82.5 percent load factor) and rising yields, we increased our revenue per available seat mile by seven percent. Unfortunately, that impressive increase didn't come close to matching the extraordinary rise in the price of fuel. During the second quarter, we paid $3.19 per gallon of jet fuel, 53 percent more than the $2.09 per gallon we paid a year ago. We are currently paying over $4.00 per gallon as oil has continued its steady march higher.
A fair question I'm often asked is why we don't simply raise fares to match our skyrocketing fuel costs, especially since our planes are full. The fact is, we have raised fares repeatedly, both directly and by restricting the number of seats available for sale at the lowest fares. We have also, as you know, introduced a number of fees that are enabling us to recapture more of the costs associated with the services we provide.
Our revenue-boosting efforts are, however, bumping up against a couple of hard realities. First, as you all know, the U.S. economy has been slowing, thus dampening the demand for air travel. In a sluggish economy, consumers are even more sensitive to price, and when we raise fares we inevitably motivate some would-be travelers to just stay home. Second, if we raise our fares and other airlines don't follow suit - as often happens - we must either withdraw our fare increase or risk losing customers to lower-priced competitors. The truth is even a small difference in price almost always costs us more revenue in lost customers than we can gain by charging the higher fare. The goal is to wring as much revenue as we can out of every seat - and an empty seat obviously generates no revenue at all.
We need to close the widening gap between our revenues and our costs, and painful as it is, one of the levers we must use to make that happen is reducing the capacity of our network. Shrinking our operation will eliminate some of the flying we are doing at a loss, and at least partially address the imbalance between supply and demand in the marketplace. That should help us as we seek to increase fares, and make those increases stick.
As we reduce capacity, we will be simultaneously accelerating the renewal of our fleet retiring older airplanes and replacing them, gradually, with newer, more fuel efficient models. We have already announced that by the end of the year we will retire 30 MD-80s, 10 A300s, 37 regional jets and 26 turbo-prop aircraft. And today we are announcing an accelerated retirement schedule for our remaining A300 fleet (34 aircraft). Those planes, which we had been planning to retire by the end of 2012, will instead be retired by the end of next year.
In light of the level of volatility in the airline industry, we've decided to put on hold our efforts to divest American Eagle. Although the strategic reasons for divesting Eagle continue to make sense, we've decided to wait until the industry has stabilized before moving forward with this divestiture. On the other hand, we expect that our agreement to sell American Beacon to an investment group will be completed in the third quarter and will further improve our cash balance.
I know it is difficult, for all of us, to see the progress we have made over the last several years wiped out by the soft economy and soaring fuel prices. But I hope you can take some solace in the fact that we have faced and met similar challenges before. We will do so again.
With the summer in full swing, I know how hard everyone is working. I want to thank you, as always, for your efforts, and remind you that in tough times, it is even more important that we take care of every customer we have. While we can't do as much as we'd like about the economy or the price of fuel, we can always do our best to make sure our customers are satisfied.
Thank you for your hard work and continued support.
Sincerely yours,
Gerard Arpey
CEO
Today we reported a second quarter loss of $284 million, excluding the special non-cash charge reflecting the write down of some of our aircraft and routes that I discussed in my letter of two weeks ago. This result compares very unfavorably to the $317 million profit we earned during the same period a year ago. It's certainly no mystery to anyone how our results could deteriorate so dramatically from one year to the next - since our roughly $600 million drop in earnings coincided with a fuel cost increase of well over $800 million.
When taken out of context, our revenue performance during the second quarter was actually reasonably good. On the strength of full planes (82.5 percent load factor) and rising yields, we increased our revenue per available seat mile by seven percent. Unfortunately, that impressive increase didn't come close to matching the extraordinary rise in the price of fuel. During the second quarter, we paid $3.19 per gallon of jet fuel, 53 percent more than the $2.09 per gallon we paid a year ago. We are currently paying over $4.00 per gallon as oil has continued its steady march higher.
A fair question I'm often asked is why we don't simply raise fares to match our skyrocketing fuel costs, especially since our planes are full. The fact is, we have raised fares repeatedly, both directly and by restricting the number of seats available for sale at the lowest fares. We have also, as you know, introduced a number of fees that are enabling us to recapture more of the costs associated with the services we provide.
Our revenue-boosting efforts are, however, bumping up against a couple of hard realities. First, as you all know, the U.S. economy has been slowing, thus dampening the demand for air travel. In a sluggish economy, consumers are even more sensitive to price, and when we raise fares we inevitably motivate some would-be travelers to just stay home. Second, if we raise our fares and other airlines don't follow suit - as often happens - we must either withdraw our fare increase or risk losing customers to lower-priced competitors. The truth is even a small difference in price almost always costs us more revenue in lost customers than we can gain by charging the higher fare. The goal is to wring as much revenue as we can out of every seat - and an empty seat obviously generates no revenue at all.
We need to close the widening gap between our revenues and our costs, and painful as it is, one of the levers we must use to make that happen is reducing the capacity of our network. Shrinking our operation will eliminate some of the flying we are doing at a loss, and at least partially address the imbalance between supply and demand in the marketplace. That should help us as we seek to increase fares, and make those increases stick.
As we reduce capacity, we will be simultaneously accelerating the renewal of our fleet retiring older airplanes and replacing them, gradually, with newer, more fuel efficient models. We have already announced that by the end of the year we will retire 30 MD-80s, 10 A300s, 37 regional jets and 26 turbo-prop aircraft. And today we are announcing an accelerated retirement schedule for our remaining A300 fleet (34 aircraft). Those planes, which we had been planning to retire by the end of 2012, will instead be retired by the end of next year.
In light of the level of volatility in the airline industry, we've decided to put on hold our efforts to divest American Eagle. Although the strategic reasons for divesting Eagle continue to make sense, we've decided to wait until the industry has stabilized before moving forward with this divestiture. On the other hand, we expect that our agreement to sell American Beacon to an investment group will be completed in the third quarter and will further improve our cash balance.
I know it is difficult, for all of us, to see the progress we have made over the last several years wiped out by the soft economy and soaring fuel prices. But I hope you can take some solace in the fact that we have faced and met similar challenges before. We will do so again.
With the summer in full swing, I know how hard everyone is working. I want to thank you, as always, for your efforts, and remind you that in tough times, it is even more important that we take care of every customer we have. While we can't do as much as we'd like about the economy or the price of fuel, we can always do our best to make sure our customers are satisfied.
Thank you for your hard work and continued support.
Sincerely yours,
Gerard Arpey
CEO
