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Higher Fuel and Labor Costs Put Dent in Corporate Profits  


It’s latest sign that inflationary forces still course through industries.

Energy and labor costs are cutting further into some corporate profits, in the latest sign that inflationary forces continue to course through industries, pressure executives and worry Wall Street.

American Airlines cut on Wednesday its quarterly profit forecast, citing surging jet fuel costs and a new pilot contract ratified in August. Package delivery giant United Parcel Service said this week it expects to book about $500 million more in contract-related costs than it expected by year-end, hitting its profit margins. In Detroit, workers are threatening a strike this week against the big three U.S. automakers.

Industries from travel to manufacturing have been contending with worker shortages as the U.S. economy emerged from the Covid-19 pandemic, providing leverage that labor unions are using to negotiate higher pay and expanded benefits. In California, healthcare facilities and restaurant operators reached separate deals this week with workers that are set to raise minimum pay for employees in the state, while West Coast dockworkers this summer secured a 32% raise through 2028.

The United Auto Workers is seeking a mid-30% raise over four years in its negotiations with automakers, alongside cost-of-living adjustments and a shorter workweek.

Fuel prices, meanwhile, have been ticking up, with gasoline prices hitting their highest levels so far this year in recent weeks. The Labor Department said on Wednesday that the con

sumer-price index rose in August at the fastest pace in more than a year, with gasoline prices driving more than half the increase.

Costlier fuel has led some companies to delay upgrades and run with leaner staffing, while charging higher prices. The International Energy Agency has said that Saudi Arabia’s extension of crude-oil output cuts until the end of the year will likely lead to a significant supply shortfall and keep gasoline prices elevated.

Fuel and labor are airlines’ biggest expenses. Both costs have climbed as the price of crude oil has run up, and as carriers have struck expensive new labor contracts.

At the same time, airfare prices are easing, raising questions about whether airlines will be able to pass along higher costs to consumers as the post-pandemic travel boom shows signs of leveling off, at least in the U.S.

American Airlines said that higher fuel prices and costs from a new labor contract pilots recently approved will cut into its thirdquarter earnings. The carrier now expects adjusted profits of 20 to 30 cents per share, down from the 85 to 95 cents it had previously anticipated.

American said that fuel prices have risen considerably since the summer—the company now expects to pay as much as $3 a gallon during the three months ending Sept. 30, up from the $2.55 to $2.65 pergallon price it expected in July.

Frontier, a discounter, said Wednesday that fuel prices are averaging about 23 cents a gallon above what it previously anticipated. At the same time, sales have been trending below normal seasonal patterns in recent weeks, the airline said.

Other carriers including United Airlines and Alaska Air Group have also flagged higher fuel prices in recent weeks, but said demand is largely holding up.

Airlines also have been factoring in higher costs from new contracts with pilots that include big wage boosts. American said last month that its third-quarter results would include $230 million in retroactive pay for pilots, after the Allied Pilots Association ratified a new contract that also included pay increases of over 40% over its four-year term. That expense is expected to reduce adjusted earnings by 23 cents per share in the third quarter, the company said Wednesday.

Southwest Airlines is still negotiating with its pilots and flight attendants but has struck deals with some other unions. It said in July that higher labor rates would drive nonfuel unit cost increases of 3.5% to 6.5% in the third quarter from the same period a year earlier. United’s pilots are in the process of voting on a new contract.

American shares fell 5.7% Wednesday with the market largely flat, while Frontier shares decreased 9.2% and other airline stocks posted smaller declines. American’s stock had been up nearly 11% from the beginning of the year through Tuesday’s close, versus a 16% increase in the S&P 500 over that time.

Atlanta-based UPS this week detailed expected costs arising from its new five-year labor contract ratified last month by the International Brotherhood of Teamsters, granting the average full-time driver $170,000 in annual pay and benefits. UPS’s full-time drivers with at least four years at the company had been earning an average wage of about $95,000 annually, or about $145,000 including benefits.

UPS said the contract will boost wage and benefit costs at a 3.3% compound annual growth rate for the next five years, and the company expects to book about $500 million more in contract-related costs by year-end than it previously anticipated.

“The reality is the new contract is actually front-loaded so that will put some pressure on margin,” UPS finance chief Brian Newman said in an interview.

Uncertainty around the contract talks and the risk of a strike prompted some customers to move away from UPS in recent months. The company said in August its secondquarter revenue fell nearly 11% to $22.1 billion, compared with the prior-year period, and income declined 27% to $2.08 billion.

UPS is working to lure customers back with reasonable pricing and reliable service, Newman said. The company is still raising the rates for its services, albeit at a slower pace, in part to offset the new influx of costs.

UPS shares have fallen about 16% since the company and the International Brotherhood of Teamsters reached an agreement in July, compared with a 2% decline in the S&P 500.

“Every labor contract that’s been negotiated has been very expensive and this one is no exception,” said Helane Becker, a senior analyst at investment bank TD Cowen.