American Airlines Drags Airline Stocks Lower Post Q1 Guidance
April 17 2023 - 7:17AM
Finscreener.org
Shares of American
Airlines (NASDAQ:
AAL) fell
over 9% yesterday after the company’s estimated profits for Q1 were
lower than Wall Street estimates due to higher labor and fuel
costs. Soon after the disclosure, shares of airline companies,
including Delta Air Line (NYSE:
DAL) and
United Airlines (NASDAQ:
UAL), fell by
2.4% and 6.5%, respectively.
The airline industry has been
able to offset rising costs thus far by increasing fares in the
face of growing global travel. However, concerns have arisen about
the sustainability of consumer demand due to high borrowing costs,
inflation, and job losses.
The announcement was made one day
ahead of Delta Air LinesU+02019 (DAL) quarterly earnings report. In
an interview, Delta’s CEO Ed Bastian stated that the airline
intends to provide premium seating on all its aircraft starting in
the summer as a precautionary measure against a potential economic
downturn. He also mentioned that the airline aims to lure customers
willing to pay more for a higher level of comfort beyond just a
seat.
What is impacting the bottom line for AAL
stock?
In January, American Airlines
reported that its fuel prices had increased by almost 70%. Despite
a broader economic slowdown in the United States, the industry has
been able to survive, largely due to constrained airline capacity
resulting from shortages of aircraft and spare parts.
American Airlines has indicated
strong demand, with total revenue per available seat mile, which is
a measure of pricing power, expected to rise by approximately 25.5%
in the first quarter of the year compared to the same period last
year.
However, the companyU+02019s
adjusted forecast for quarterly profit per share is between $0.01
and $0.05 per share, down from the previous estimate of near
break-even and lower than analystsU+02019 expectation of $0.06 per
share, according to Refinitiv data.
What next for American AirlinesU+02019 stock
price?
Investing in American Airlines
stock and its peers remains a high-risk proposition due to the
following reasons:
- Industry Risk: The airline
industry is highly competitive, and its profitability can be
impacted by various factors such as fuel prices, labor costs, and
economic conditions. The industry has also been impacted by the
COVID-19 pandemic, which led to reduced demand and increased
costs.
- Financial Risk: American
Airlines has a significant amount of debt, which can make it
vulnerable to changes in interest rates and its ability to meet its
debt obligations.
- Operational Risk: The airline
industry is heavily regulated, and operational risks such as
accidents, security breaches, and disruptions in the supply chain
could adversely affect the companyU+02019s
operations.
Analysts tracking AAL stock
expect sales to rise by 8.7% to $53.2 billion in 2023, while
adjusted earnings might expand almost 400x to $2.39 per share. So,
American Airlines stock is priced at 5.4x forward earnings, which
is very cheap. ItU+02019s also trading at a discount of 30% to
consensus price target estimates.
The final takeaway
Throughout 2022, investors in the
airline industry anticipated a drop in demand as post-pandemic
travel levels normalized and the Federal Reserve implemented
measures to cool the economy. While there has been no significant
decline in demand thus far, rising costs continue to act as a
headwind for American Airlines and its peers.
Nevertheless, risks persist,
particularly as interest rates continue to rise. As earnings season
approaches, investors will closely monitor management commentary on
2023 to gain insight into early bookings for the crucial summer
travel season.
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