American Airlines Stock Rose after Upbeat Q3 Earnings

American Airlines (AAL) stock was trading nearly 2% higher during pre-market trading today. The company reported better-than-expected third-quarter earnings results. The company’s third-quarter earnings increased 20% YoY to $1.42 per share and beat analysts’ estimate of $1.40.

American Airlines reported impressive third-quarter earnings results despite the massive negative impact from Boeing’s (BA) 737 MAX grounding. Notably, the 737 MAX has faced a worldwide flying ban since mid-March after two fatal crashes within five months.

American Airlines has 24 Boeing MAX planes. During the earnings release, the company revealed that it suffered 9,475 flight cancelations in the third quarter due to the MAX grounding. The flight cancelations caused a negative impact of $140 million on American Airlines’ third-quarter pre-tax income.

American Airlines’ third-quarter earnings drivers

We think that higher revenues and lower fuel costs more than offset the negative impact of the MAX grounding. American Airlines’ third-quarter revenues of $11.91 billion were almost in line with analysts’ estimates of $11.93 billion. The quarterly revenues grew 3% YoY due to higher unit revenues and an increased load factor.

The airline’s unit revenues grew 2% YoY to 15.71 cents. The passenger load factor expanded by 320 basis points to 85.6%. In the earnings release, American Airlines revealed that its third-quarter results mainly benefited from healthy corporate and leisure demand.

We think that the company’s revenues would have also benefited from increased ticket prices. According to JPMorgan Chase’s report on June 13, American Airlines raised fares twice in the second quarter.

The company’s unit cost increased 1% YoY to 14.64 cents. However, excluding fuel expenses, the unit cost rose 5% YoY to 11.07 cents. The company registered a 2% YoY increase in total operating expenses to $11.1 billion. The YoY rise in operating expenses was mainly due to higher salaries, increased maintenance expenses, and lower-than-planned capacity expansion.

However, lower fuel costs partially offset the negative impact of the factors mentioned above. In the third quarter, the average fuel cost fell 11.1% to $2.05 per gallon compared to $2.30 in the third quarter of 2018.

Downbeat fiscal 2019 outlook

Despite reporting impressive third-quarter results, American Airlines lowered its earnings outlook for fiscal 2019. The company expects its 2019 EPS to be between $4.50 and $5.50. Previously, the company had an EPS guidance range of $4.50–$6.00 this year.

Apart from lowering the 2019 EPS guidance, American Airlines reduced the expectation for its seating capacity enhancement. The company expects the capacity to increase 1% YoY. Previously, the company expected the capacity to increase 1.5% in 2019.

American Airlines expects the MAX grounding to reduce its 2019 pre-tax income by $540 million—compared to the previous projection of $400 million. Despite the lower-than-anticipated capacity increase, the company expects the unit cost to increase 3.5%–4.5% in 2019.

For the fourth quarter, American Airlines expects 2.7% YoY growth in capacity. The company expects its unit revenues to increase in the band of flat to 2%. Meanwhile, the company expects its fourth-quarter total unit cost to rise 2%–4%. American Airlines expects the fourth-quarter pre-tax margin to be between 5% and 7%.

Peers’ performance

All of the top four US carriers reported better-than-expected third-quarter earnings and registered a strong YoY improvement. Delta Air Lines’ (DAL) third-quarter EPS of $2.32 beat analysts’ expectations of $2.26 and increased 33% YoY. United Airlines’ (UAL) third-quarter EPS of $4.07 increased 33% and beat analysts’ estimates by $0.10. Southwest Airlines’ (LUV) third-quarter EPS of $1.23 increased 14% and beat analysts’ expectations of $1.08.