American Airlines Group Inc (NASDAQ:AAL) reported better-than-expected results on lower fuel costs, helping AAL stock to resume its ascent. But the real boost came from a pledge to pare back on growth plans.
Counterintuitively, the drop in oil prices has actually been a drag on airline stocks. Investors are worried that fuel-cost savings will prompt AAL and others to add flights and cut fares at a time of waning demand.
After all, they’ve been guilty of that before.
Furthermore, oil prices have already bottomed. If nothing else, still-low-but-rising fuel costs set American Airlines and the industry up for more difficult comparisons going forward.
Separately, lower fuel costs lead to smaller fuel surcharges on international flights, which puts pressure on the critical metric of Passenger Revenue per Available Seat Mile (PRASM).
With these difficulties emerging amid Brexit, Zika, heightened terrorism fears, an industry slowdown and shaky global macroeconomics, the market is understandably concerned. That’s why AAL moved to reassure investors that it won’t fall into an overcapacity pit.
American Airlines said it will defer 22 Airbus Group SE A350 XWB. The company hardly needs more aircraft now, and it should lighten capital spending by $500 million this year and $700 million in 2018. And last week it cut its growth plans for 2016.
This by no means fixes the broader industry’s capacity and pricing issues, but it shows that AAL is being mindful of its own nest.
AAL Stock Gains Altitude
American Airlines really has no choice, as the earnings report plainly shows. The company eclipsed forecasts because of fuel prices, which happen to be rising.
For the most recent three-month period, American Airlines’ net income tumbled to $950 million, or $1.68 a share, vs. $1.7 billion, or $2.41 a share, in the year-ago quarter.
However, on an adjusted basis — which is what the market cares about — earnings came to $1.77 per share of AAL stock. On that basis, American Airlines clobbered the Street’s forecast, which stood at $1.68 a share, according to a survey by Thomson Reuters.
Revenue measures were another matter. The top line contracted by 4.3% to $10.4 billion, edging past the $10.3 billion analysts’ had projected. What’s troubling is that PRASM declined 6.3% and passenger yield fell 5.3%. That’s what happens in an environment of “competitive capacity growth, continued global macroeconomic softness and foreign currency weakness,” as AAL described it.
Happily for shareholders, American Airlines stock too off on the news, rising as much as 3.5% in the first hour of trading. The big earnings beat and nod to overcapacity risks was clearly reassuring to investors. AAL stock has been climbing steadily since it bottomed in late July, and this shot-in-the-arm earnings report suggests it will regain even more lost ground.
The outlook for the airline industry is murky, but it appears the market overdid the selloff in American Airlines stock. This rebound has some room to run.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
