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American Airlines reports 25 percent drop in first quarter profit

A dip in quarterly revenues and a less-than-rosy forecast for the rest of the year sent American Airlines’ stock down almost five percent on Friday.

“We don’t view the current revenue trends as either acceptable or long term,” American chief executive Doug Parker said on a conference call with Wall Street analysts. “None of us were looking out a year ago and thinking we’d see these kinds of revenue declines.”

Shares of American [ticker: AAL] dropped $1.80, or 4.5 percent to close at $38.21 on Friday.

American’s first quarter profit dropped almost 25 percent, mainly due to tax payments. The Fort Worth-based carrier said its first quarter net income was $700 million, down from $932 million in the first quarter of 2015. American had a reversal of its tax valuation allowance at the end of 2015 and as a result had to report a $417 million provision for income taxes in the first quarter.

The carrier cited a number of factors, such as a slowing Latin America economy and a strong U.S. dollar versus foreign currencies, as to why its revenues declined. Executives admitted American was the slowest growing airline in the U.S. last year and it plans to reduce its capacity plan as it continues to see declining unit revenues.

American told investors its unit revenues, the amount it earns for each passenger flown a mile, are expected to decline between six and eight percent in the second quarter.

The carrier expects to introduce its basic and premium economy products later this year which should help improve the carrier’s revenues in 2017, the company said.

Excluding one-time accounting items, American’s net profit was $765 million, or $1.25 per share, beating Wall Street analysts’ estimates of $1.19, according to FactSet Research.

“There is still too much capacity in the system to handle current demand, and fares remain low as airlines struggle to find a balance between capacity and demand,” Cowen and Co. analyst Helane Becker wrote in a research note to investors on Friday. “Capacity is growing faster than GDP and demand growth is not keeping pace.”

American added 3.6 percent more capacity to its network during the quarter and its planes were slightly less full as its load far dropped 0.3 percentage points to 79.6 percent.

Lower fuel prices saved the airline over $500 million as its fuel costs dropped 33 percent compared to the first quarter in 2015. The company paid $1.20 per gallon of jet fuel in the quarter.

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American set aside $73 million for a profit sharing plan it announced last month, for its 110,000 employees.

“The announcement had the impact that we had hoped,” Parker told investors. “Our team is excited. They’re engaged. They’re intent upon returning American to be the greatest airline in the world.”

The carrier also announced a new $2 billion share repurchase program and plans to pay a 10-cent dividend to shareholders on May 18. American ended the quarter with $6.9 billion in unrestricted cash and short-term investments.

Andrea Ahles: 817-390-7631, @Sky_Talk