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Why Analysts Downgraded American Airlines’ 2016 Revenue Forecast

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American Airlines’ revenue

Analysts’ estimates act as proxies for what’s priced into a stock. They often also serve as effective first screeners for investors. Thus, it’s important to analyze analysts’ estimates when considering making investments.

In 1Q16, American Airlines’ (AAL) revenue fell by 4% to $9.4 billion. This fall is expected to increase to 5% in 2Q16 and then slow to 2% in 3Q16. For 4Q16, AAL’s revenue is expected to rise by just 0.41% compared to the 1.2% growth expected earlier. This will lead to a revenue fall of 2.6% in 2016 compared to the 1.3% fall that had been expected.

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Competitive capacity growth

In the company’s most recent earnings call, its management stated that AAL’s capacity was growing faster than economic growth in all regions, but that it expected growth to moderate in the second half of 2016.

However, at one of its major hubs in Dallas, AAL expects its capacity to keep growing at a high rate. Increased competition, especially from low-cost carriers, is one of the major factors impacting AAL’s revenue.

Latin America slows

Latin America continues to face macroeconomic challenges. Weakening demand and currency in Brazil and Venezuela will continue to affect AAL’s Latin American operations. In fact, AAL’s management doesn’t expect any improvement in Latin America unless Brazil turns around.

Outlook

American Airlines’ passenger revenue per available seat mile (or PRASM) fell by 7.5% in 1Q16.

In addition to the two factors mentioned earlier in this article, a strengthening US dollar and low fuel surcharges are expected to impact AAL’s 2016 unit revenue. All these factors have led AAL to predict a 6%–8% fall in its PRASM for 2016. Currency and surcharge declines will account for 1.7% of this fall compared to their 2.1% contribution in 2015.

Legacy carriers such as Delta Air Lines (DAL), United Continental (UAL), and Alaska Air Group (ALK) also expect their unit revenues to fall in 2016.

The PowerShares Dynamic Market ETF (PWC) invests ~1.8% of its portfolio in American Airlines.

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