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Why Analysts Expect American Airlines’ Revenue to Decline in 2016

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American Airlines’ revenue

Analyst estimates act as a proxy for what’s being priced into a company’s stock. They often also serve as an effective first screener for investors. Thus, it’s important to examine analyst estimates before investments.

For 1Q16, analysts estimate American Airlines Group’s (AAL) revenues to decline by 4% to $9.4 billion and then to slow down to 2% and 0.5% in 2Q16 and 3Q16, respectively. For 4Q16, revenues are expected to grow by 1.2%, leading to a fiscal year revenue decline of 1.3% to $40.5 billion.

Why Analysts Expect American Airlines' Revenue to Decline in 2016

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Unit revenues

The strengthening dollar and falling fuel surcharges have negatively affected airlines’ PRASM (passenger revenue per available seat mile). Legacy carriers like Delta Air Lines (DAL), United Continental Holdings (UAL), and AAL have had to bear the greater brunt, as they earn higher revenues from international markets. AAL’s PRASM declined by 7.4% in 4Q15 and 6.5% in 2015 overall.

Outlook

Analysts expect similar factors—high capacity growth, the strong US dollar, and low fuel surcharges—to impact 2016 unit revenues. Weakening revenues and currency in Brazil and Venezuela will likely continue to affect AAL’s South American operations. In fact, AAL’s management does not expect any improvement in South America unless Brazil turns around. The company’s Pacific segment will also likely contribute to revenue weakness, with both Japan and Chinese economies slowing down.

All these factors are expected to lead to a 6%–8% decline in AAL’s PRASM in 2016. Currency and surcharge declines should account for 1.7% of this decline, compared to the 2.1% contribution seen in 2015. AAL’s increasing traffic should offset some pressure, however slowly.

Notably, the Dynamic Leisure & Entertainment ETF (PEJ) invests ~5% of its portfolio in each of Southwest Airlines (LUV), American Airlines (AAL), DAL, and UAL.

Now let’s take a look at American Airlines’ margins.

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