American Airlines CEO says high fuel costs may persist October 26, 2000

By Michael Connor

BOCA RATON, Fla. (Reuters) - The head of American Airlines, the world's second largest air carrier, said on Thursday jet fuel costs looked likely to remain high well into 2001 because of crisis in the Middle East.

Donald Carty, chief executive of American and its parent AMR Corp. (AMR.N), said American had been betting on price drop in early 2001 because of a pledge by Saudi Arabia to step up oil production and a decision by the U.S. government to tap fuel reserves to ease prices.

``The turmoil in the Middle East appears to have set that back,'' Carty told Reuters at a meeting in Boca Raton, Fla., of the Business Council grouping of top U.S. chief executives. ``It has made the oil markets very anxious.''

Carty said Fort Worth, Texas-based American, which last week reported a strong, 51 percent rise in quarterly earnings undimmed by added spending for jet fuels, was now expecting a longer wait for a turnaround in world oil prices.

``I think that what we would otherwise have predicted some softening by at least the end of the (North American) winter we're now beginning to be concerned about because of the uncertainty in the Middle East,'' the executive said.

American had been well hedged against rising fuel prices in 2000, offsetting nearly $500 million in costs with financial risk instruments but still had spent $350 million more on fuel than had been expected at the start of the year, he said. Some of the costs were passed on to American's travelers, he said, but the more expensive tickets had done little to hurt demand and profitability at the carrier. Smaller rivals such as US Airways (U.N), have blamed expensive fuel for operating losses.

Crude oil futures currently trade at about $33.25 a barrel, roughly $10 higher than a year ago, and near a decade high of almost $38 they reached last month. Carty said American had hedging in place for about 40 percent of its 2001 fuel purchases, sharply below the 70 percent rate.

``So we really do hope the price of fuel comes down because the consequence of it not coming down is that you will see further price increases for passengers,'' he said. Carty also said American expects the U.S. government to soon announce a decision closely watched in the industry on which U.S. carrier will win the right to new routes between the United States and China.

American is competing with Delta Air Lines Inc. (DAL.N) and package delivery giant United Parcel Service Inc. (UPS.N) and would, if chosen, operate flights between Chicago and Shanghai, and possibly Beijing, he said.

Copyright B) Reuters Limited.

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-- Martin Thompson (mthom1927@aol.com), October 26, 2000