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Will American Airlines’ Pilot Fiasco Hurt Holiday Travel?

Zacks

American Airlines Group AAL is one of the most well-known names in the airline industry. However, the company has been in the news for wrong reasons of late. Pilots at the carrier will be on vacation during the busy Christmas week, thanks to a scheduling glitch.

As a result of the computer failure, the pilots’ union — Allied Pilots Association (APA) — estimated that approximately 15,000 flights are likely to be affected during the Dec 17- Dec 31 period. This is because they do not have assigned pilots. It is feared that flights from some of the carriers’ biggest hubs like Chicago's O'Hare and New York's LaGuardia airports are likely to be pilot less, thanks to this bizarre problem.

According to a Yahoo Finance report, the Trip Trade app, which is used for assigning flights to pilots, malfunctioned due to a computer glitch. As a result of the scheduling error, the system apparently showed that the requisite staffing was available at the carrier to operate the scheduled flights during the period, even though it was not actually the case.

Naturally, the news of pilot shortage at the largest U.S. carrier caused panic as the travel plans during the Christmas holiday period will be thrown hay aware in the event of the forecast coming true. Consequently, some customers had to apparently contact the carrier in a bid to get assurance that their travel plans will not be hampered.


American Airlines Swings into Action

American Airlines is leaving no stone unturned to deal with this issue of pilot shortage to avoid the inconvenience likely to be caused during the holiday period. According to media reports, the carrier had taken measures like using standby pilots and offering them 150% of their normal hourly pay in order to avoid flight cancellations during the busy travel period. In December, American Airlines plans to operate 200,000 flights.

The carrier said that apart from about “a few hundred” there are pilots to operate the rest. This was probably directed to mitigate fears of travel-related disruptions among its passengers. However, the above view of American Airlines differs from that of the APA which stated that “Thousands of Flights Still Unassigned.” Consequently, a conflict between the carrier and the APA on the issue in the coming days cannot be ruled out.

Also, customer-related issues had hurt the industry quite significantly this year. The infamous David Dao incident at United Continental Holdings UAL, which earned it worldwide criticism, was one such issue. Meanwhile, measures taken by American Airlines, substantiates the fact that this carrier is certainly planning to avoid a similar fate in the coming days. The stock carries a Zacks Rank #3 (Hold).

Other carriers like Spirit Airlines SAVE and Delta Air Lines DAL had also been affected by customer-related issues this year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Whatever the final outcome, the measures taken by American Airlines to combat this unwarranted crisis are likely to push up labor costs even further. With fuel costs also on the rise, the bottom line is likely to be significantly hurt in the fourth quarter due to escalating operating expenses.

Computer Glitches not Uncommon

American Airlines is not the only carrier to suffer from a scheduling glitch. A similar issue in September had hurt European low-cost carrier, Ryanair Holdings RYAAY. According to a CNBC report, the carrier had to cancel 2,000 flights resulting in significant customer harassments.

Technical glitches, in fact, have been a great nuisance for carriers. Earlier in 2017, British Airways, the largest carrier in the UK (in terms of on fleet size), encountered a major IT system failure resulting in cancellation of flights and untold miseries to the concerned travellers. Additionally, a computer glitch recently disrupted operations at Southwest Airlines LUV. Since expenditure on technological infrastructure is a major one for airlines, their profitability might be hurt in the event of such malfunctions.

Will the American Airlines Issue Hurt the Industry's Recovery?

Airline stocks seem to be back in favor again, after being laid low for most part of the year due to multiple headwinds ranging from the back-to-back hurricanes, the devastating earthquake in Mexico and high costs.

Evidently, the Zacks Airline Industry had underperformed the S&P 500 Index in the first nine months of the current year. While the S&P 500 index gained 11.9%, the industry rallied 8.8%.


However, the industry seems to be limping back to normalcy as indicated by the upward share price movements at major carriers like JetBlue Airways JBLU (up 15.6%) and Delta (up 9.1%) since the beginning of the current quarter.

Also, the Zacks Airline industry has outperformed the S&P 500 Index on a quarter-to-date basis. While the industry rallied 7.8%, the S&P 500 Index has gained 5.3% in the same period.

The Zacks Industry rank of 63 carried by the 26-member Zacks Airline Industry also highlights the fact that airline stocks are back in favor. The favorable rank places the industry in the top 25% of the 250+ groups enlisted. The bullish stance on the industry is further augmented by the fact there have been 12 positive estimate revisions in the fourth quarter of 2017.

The improving scenario for the airline space can be well gauged from the fact that the Zacks Industry Rank has improved immensely, given the industry’s 200+ rank only a few months ago.

However, the latest customer-related issue at American Airlines might prove to be a dampener, as far as the recovery of airlines is concerned. The fears are likely to turn into reality in the event of the Christmas holiday travel plans of passengers being hampered due to pilot shortage. Naturally, investors interested in the airline space are anticipated to keenly await for updates on this burning issue.

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