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Here’s Why American Airlines Lost Ground Despite Upbeat View

Zacks

Shares of American Airlines Group Inc. AAL declined 4.7% to close the trading session on Apr 10 at $47.46. The stock lost value despite a bullish outlook on first-quarter unit revenues provided by the carrier at an investor update.

The Guidance

This Fort Worth, TX-based company now expects total revenue per available seat mile (TRASM: a key measure of unit revenues) to increase between 3% and 4% year over year in the first quarter of 2018 (previous guidance anticipated the metric to grow in the 2-4% band). Strong demand for air travel coupled with improving yields might have led to the bullish view.

Notably, American Airlines is not the only carrier to unveil a bullish unit revenue view for the first quarter. Of late, fellow-airline operators like United Continental Holdings, Inc. UAL and Delta Air Lines, Inc. DAL had also issued bullish unit revenue projections for the soon-to-be-reported quarter.


Coming back to this Zacks Rank #3 (Hold) company’s guidance, pre-tax margin (excluding special items) is now anticipated between 4% and 5%, reflecting an improvement from the previous guidance of 2-4%. Detailed results are expected to be unveiled on Apr 26.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Additionally, the carrier reduced its projection for non-fuel cost per available seat miles (CASM), which is another positive aspect of the guidance. The metric is now expected to increase 3% in the first quarter of 2018 compared with the previous projection that had hinted at a 4% increase. However, the metric is still anticipated to increase approximately 2% in 2018.

The company also maintained its projection pertaining to an increase in the metric between 1% and 2% in each of 2019 and 2020. In the current year, capacity (system) is still expected to improve 2.5% year over year. Adjusted earnings per share are also envisioned between $5.50 and $6.50 for 2018.

Furthermore, American Airlines, which is constantly looking to modernize its fleet, aims to spend approximately $3.7 billion toward capital expenditures in the current year. Out of which, $1.9 billion is expected to be shelled out for aircraft related matters.

In keeping with its objective of fleet modernization, American Airlines recently inked a deal worth $12 billion with The Boeing Company BA (Read more: Boeing, American Airlines Ink $12B Deal for 47 Dreamliners).

Then Why the Decline

The above-mentioned bullish projections failed to please investors, which is evident from the decline in stock price on Apr 10. The main reason behind the downside was the spike in oil prices. On Apr 10, U.S. crude prices hit a three-year high of more than $65 a barrel. Mounting tensions related to Syria contributed to the upsurge. We note that high oil prices do not bode well for companies in the airline space as fuel costs account for a significant chunk of their expenditures.

In fact, not only yesterday, oil prices have been on an uptrend lately and were up approximately 8% in the January-March period. In fact, the first quarter of 2018 witnessed U.S. oil benchmark reach its highest settlement since December 2014. Given the inversely proportional relation between oil prices and airline stocks, this increase in crude prices is expected to hurt results for carriers in the soon-to-be-reported quarter.

The rise in oil prices can be made out from American Airlines’ projection on the metric. The carrier expects fuel prices (including taxes) between $2.08 and $2.13 per gallon in the first quarter of 2018, which is much higher than the comparable year-ago figure of $1.7 per gallon.

Disappointing Price Performance

The American Airlines stock’s unsatisfactory price performance was not limited to yesterday only. In fact, the company has not had a healthy run on the bourse lately with its stock price declining 18.8% in the last three months.

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