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American Airlines announces downward margin revision for 1Q15

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Traffic declines despite strong Pacific market growth

American Airlines’s (AAL) revenue passenger mile (or RPM) declined for the third consecutive month by 2.8% to 16,817 million in January. Traffic decreased by 3.9% in the domestic market and by 3.5% in the international market. American’s growth has been concentrated in the Pacific market for the last couple of months.

While other markets recorded negative growth rates, only the Pacific region recorded a very high positive growth of 27% in January, 24.4% in December, 14.6% in November, and 16.7% in October. Traffic declined by 5.3% in the Latin American market and by 10.8% in the Atlantic market.

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Capacity

American’s capacity decreased by 0.2% in January after increasing by 3.7% in December. Capacity in domestic market declined by 0.5% while the international market capacity decreased by 2.4%. To support the high traffic growth in the Pacific market, capacity increased by 36.3% in this market, but declined in the Atlantic and Latin American markets. The highest decline in capacity utilization was also recorded in the Pacific market, where load factor declined to 79.8% from 85.6%. The overall utilization rate decreased by 2.1% to 78.2%.

Traffic and capacity growth was weak for American Airlines (AAL) and United Continental Holdings (UAL) in the fourth quarter, leading to a decline in load factors. Its peers recorded strong traffic growth, including Delta Air Lines (DAL), Alaska Air Group (ALK), JetBlue Airways (JBLU), and Southwest Airlines (LUV).

Downward revision of 1Q15 pre-tax margin

American Airlines expects its 1Q15 unit revenue, or passenger revenue per available mile (or PRASM), to increase between 2% to 4%. American also revised down its pre-tax margin excluding special items to an estimated 12%–14% from the earlier estimate of 13%–15%. This is due to the revised fuel estimates.

As fuel prices started to increase, American revised its estimated fuel cost to $1.81–$1.86 per gallon from its previous estimate of $1.71–$1.76 per gallon. 

Investors can gain access to companies like American Airlines through ETFs such as the iShares Transportation Average ETF (IYT), which holds ~38% in airline stocks. 

For a complete company overview of American Airlines, read Market Realist’s series, Must-know: An overview of the American Airline Group.

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