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Why Is American Airlines (AAL) Down 19.7% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for American Airlines (AAL). Shares have lost about 19.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is American Airlines due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Earnings Beat at American Airlines in Q2

American Airlines’ second-quarter 2019 earnings (excluding 33 cents from non-recurring items) of $1.82 per share surpassed the Zacks Consensus Estimate by 5 cents. Moreover, the bottom line increased on a year-over-year basis. Revenues totaled $11,960 million, which were in line with the Zacks Consensus Estimate. However, the top line improved 2.7% on a year-over-year basis. Passenger revenues, which accounted for bulk of the top line (92.1%), increased 3.2%.

Total revenue per available seat miles (TRASM: a key measure of unit revenues) increased 3.5% to 16.54 cents in the reported quarter. Passenger revenue per available seat miles (PRASM) increased 4% to 15.22 cents in the second quarter. Consolidated yield increased 0.1%.

While traffic (measured by revenue passenger miles) was up 3.1%, capacity (measured by average seat miles) contracted 0.8%. Consolidated load factor (percentage of seats filled by passengers) expanded 320 basis points to 86.6% as traffic growth outpaced capacity expansion.

Total operating expenses (on a reported basis) increased 1.6% year over year to $10,807 million due to 3.4% increase in expenses pertaining to salaries, wages and benefits. Consolidated operating costs per available seat miles (CASM: excluding fuel and special items) increased 4.8% to 11.34 cents. The increase was due to lower-than-expected capacity following the prolonged grounding of Boeing 737 MAX jets and operational disruptions. Average fuel cost per gallon (on a consolidated basis: including taxes) declined 4.4% to $2.14.

Q3 Outlook

TRASM is expected to increase between 1% and 3% on a year-over-year basis. Pre-tax margin excluding special items is projected in the range of 5.5-7.5% in the third quarter. Additionally, fuel costs are estimated between $2.05 and $2.10 per gallon in the third quarter. The company predicts third-quarter non-fuel unit costs to increase in the 4-6% range. Capacity is expected to grow approximately 1.5% in the third quarter of 2019.

2019 Outlook

American Airlines anticipates its current-quarter pre-tax income to be hurt to the tune of roughly $400 million due to the grounding of the Boeing 737 MAX jets. American Airlines, with 24 Boeing 737 MAX jets in its fleet, has stated that the jets would remain grounded till Nov 2.

Capacity is expected to increase 1.5%. CASM (excluding fuel, new labor deals and special items) is now anticipated to increase in 3.5-4.5% range (previous guidance was in the 2-3% band). The increase is due to the reduction in capacity following the grounding of the American Airlines’ 737 MAX fleet. The company’s capex projection for the current year stays at $4.4 billion.

American Airlines now expects 2019 earnings per share between $4.5 and $6 (earlier outlook:  $4- $6).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -10.94% due to these changes.

VGM Scores

Currently, American Airlines has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, American Airlines has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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