Cheap fuel to save $5 billion at American Airlines

American Airlines and merger partner US Airways reported better-than-expected fourth-quarter earnings Tuesday, and the company expects to save $5 billion this year in lower fuel costs.

Philadelphia's largest carrier does not buy expensive fuel hedges to protect against swings in oil prices. American pays market prices, and during the recent sharp drop in oil, the airline has cashed in - saving 17 percent on jet fuel in the latest quarter.

Despite record profits, a new $2 billion stock buyback program announced Tuesday, and a 10-cents-per-share quarterly dividend, American's shares fell 5 percent after the company said a key revenue measure would fall in the first quarter.

Passenger revenue for each mile flown will be lower because of new competition on 50 routes, some from low-fare carriers adding flights in airports including Philadelphia, Dallas-Fort Worth, Chicago, and Washington. American matched the lower fares, which hurt unit revenue.

"We continue to feel good about the demand environment, though there are some specific headwinds," president Scott Kirby said.

Net income was $1.1 billion, or $1.52 a share, excluding special items, in the fourth quarter. That beat analysts' average estimate of $1.51. Revenue rose 2.1 percent to $10.2 billion.

"This is the best year in the long, proud history of American Airlines," chief executive officer Doug Parker said on a conference call.

"We are well aware that much of the tailwind pushing our industry in 2015 is due to a significant and recent drop in oil prices," Parker said. "Our perspective is that Brent [crude] was over $100 a barrel for nearly four years and has been under $100 a barrel for nearly four months, so we're going to continue to run American as though we're still operating with $100-per-barrel oil. We think that's best for our investors, our team members, and our customers."

Two consumer groups wrote to 12 U.S. airline CEOs last week demanding that they cut airfares "in light of the 50 percent reduction in jet fuel prices since June."

"Gasoline pump prices have declined so much that many Americans will reconsider driving instead of flying," wrote Charles Leocha of Travelers United and Paul Hudson of FlyersRights.com.

But as long as travel demand remains strong, don't expect fares to fall. "We are using the profits we're producing to invest in products that matter to our customers," Parker said. Amenities include lie-flat seats in front cabins, WiFi on international flights, and improved check-in and club lounges at airports.