(Reuters) - American Airlines Group Inc AAL.O on Friday reported quarterly revenue and adjusted profit that beat analyst projections, helped by strong passenger demand and improving average fares.

A passenger arrives to check in for an American Airlines filght at O'Hare International Airport in Chicago, Illinois, U.S.October 28, 2016. REUTERS/Jim Young

The No. 1 U.S. airline by passenger traffic said total operating revenue grew to $11.11 billion in the second quarter through June 30, from $10.36 billion a year earlier. The figure beat analysts’ expectations for $11.07 billion.

However, operating expenses swelled, increasing 11.1 percent to $9.6 billion, on the back of higher fuel and labor costs.

For the third quarter, American said it expects to see its total revenue per available seat mile inch up between 0.5 percent and 2.5 percent. The airline’s pretax margin is forecast to land between 10 percent and 12 percent for the late summer period.

“American 3Q guidance falls notionally short of consensus, but embraces buy-side expectations for (revenue per available seat mile),” JPMorgan analyst Jamie Baker wrote in a research note. “Guidance should suffice.”

American shares were down 1.9 percent at $49.05 in morning trading, after earlier rising in premarket. Shares across the broader U.S. stock market also slipped.

The Fort Worth, Texas-based carrier’s net income fell to $803 million, or $1.63 per share, in the quarter, from $950 million, or $1.68 per share, a year earlier.

On an adjusted basis, American Airlines earned $1.92 per share, topping analysts’ consensus forecast of $1.87 per share, according to Thomson Reuters I/B/E/S.

American surprised investors earlier this year by offering an unexpected mid-contract pay increase to its pilots and flight attendants, at an estimated expense of $230 million for 2017.

With the pay hike, which frustrated Wall Street and at the time sent American’s stock spiraling downwards, flight crew received on average 5 percent to 8 percent salary increases in hourly pay, in an adjustment to match rival carriers.

American attributed a 12.5 percent increase in salary and benefits, and a 15.4 percent jump in consolidated fuel expense, for the rise in operating expenses. Total second-quarter cost per available seat mile rose 9.6 percent to 13.34 cents.

“We look at this mid-contract pay increase as a long-term investment,” American Chief Executive Doug Parker said on the carrier’s Friday earnings call. “We know it’s the right idea.”

Unit revenue, which compares sales to flight capacity, rose 5.7 percent.