American Airlines Expects Higher Revenue despite Boeing Trouble

Raises unit revenue guidance

American Airlines (AAL) raised its second-quarter unit revenue guidance yesterday even though it faced a massive amount of flight cancellations due to the grounding of Boeing’s (BA) 737 MAX planes. The airline now anticipates revenue per available seat mile to grow between 3% and 4% YoY in the quarter instead of its earlier guidance range of 1% to 3%. The upbeat unit revenue guidance reflects healthy demand and a higher passenger yield in the quarter.

American Airlines Expects Higher Revenue despite Boeing Trouble

Notably, major US airlines have raised their ticket fares twice in the second quarter, which is driving their passenger yields. Citing a JPMorgan Chase research report published on June 13, Bloomberg reported American Airlines, Hawaiian Holdings, and Southwest Airlines (LUV) had raised ticket prices for the second time in less than six months.

MAX grounding to hurt bottom line

American Airlines raised its second-quarter unit revenue guidance even though it faces massive flight cancelations due to the grounding of Boeing 737 MAX planes. Notably, 737 MAX planes have been grounded worldwide following two fatal accidents that killed 346 people.

American Airlines currently owns 24 Boeing 737 MAX planes. The company, in its updated outlook revealed that the grounding of these 24 jets has resulted in approximately 7,800 flight cancellations during the second quarter.

The airline estimates the massive cancellations due to the MAX grounding would negatively impact its second-quarter pre-tax income by $185 million. During an investor update in April, American Airlines had predicted a negative impact of $350 million on its full-year 2019 pre-tax profit, if MAX planes remain grounded until August.

It is still uncertain when Boeing will get safety approval for its MAX planes. Therefore, American Airlines on June 11 announced removing all its Boeing MAX aircraft fleets from flight schedule through September 3. The announcement marked the third time in the last four months that the airline has extended the grounding period of Boeing’s troubled jets.

Apart from American Airlines, Southwest Airlines, and United Airlines (UAL) are also facing massive flight cancellations due to MAX grounding. Southwest Airlines has canceled all its MAX fleets through October 1, while United Airlines has announced removing its MAX flights from schedule through September 3.

Southwest Airlines, which owns 34 MAX planes, is estimated to have 100 daily flight cancellations, signifying ~2.5% of its total 4,000 daily flights. Similarly, United Airlines recently revealed that it faced 3,440 flight cancellations during second quarter due to MAX grounding.

Cost and margin outlook

On the cost front, American Airlines anticipates its average fuel cost per gallon to be in the range of $2.12–$2.17, lower than the earlier guidance of $2.14–$2.19. However, it increased the lower end its ex-fuel CASM (cost per available seat mile) forecast due to lower-than-anticipated capacity additions. Ex-fuel CASM is now projected to grow in the range of 4.5%–5.5% instead of the earlier projection of 3.5%–5.5%.

Citing higher revenue growth and lower fuel expenses, American Airlines increased pre-tax margin expectations for the quarter. The company now projects a pre-tax margin between 8.5% and 9.5%, up from its previous projection of 7%–9%.

Stock performance

American Airlines stock had a rough ride this year so far with gains of a mere 2.6%. Global economic slowdown concerns and uncertainty over the US-China trade negotiations kept the entire industry highly volatile throughout this year. Additionally, business disruptions due to the partial government shutdown, severe winter conditions, and massive flight cancellations due to Boeing’s troubled jets kept investors worried about American Airlines’ near-term growth prospect.

The stock has underperformed the gains of the iShares Transportation Average ETF (IYT), which has risen 12.2% YTD. The ETF invests in Dow Jones listed US transportation stocks, and 19% of its investment is in the passenger airline industry.

The YTD return of American is much lower than its top peers. Shares of Delta Airlines, Southwest Airlines, and United Airlines are up 19.2%, 11.6%, and 6.9%, respectively, YTD.