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Can American Airlines (AAL) Beat High Costs in Q4 Earnings?

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American Airlines Group Inc. (AAL - Free Report) is scheduled to release fourth-quarter 2018 earnings numbers on Jan 24, before the market opens.

Last reported quarter the company came up with a positive earnings surprise of 0.9%. However, the bottom line decreased on a year-over-year basis, mainly due to high fuel costs. Revenues also beat the Zacks Consensus Estimate and improved on a year-over-year basis owing to strong demand for air travel.

However, things don’t seem to be looking up for the company this earnings season. Notably, the Zacks Consensus Estimate for fourth-quarter earnings has moved 4.6% south in the last 30 days.

Factors Likely at Play

Fuel prices, although at modest levels lately, are likely to hamper the company’s bottom-line growth in the fourth quarter. This is because fourth-quarterfuel price estimate remains at a high level when a year-over-year comparison is made. The company projects average fuel price per gallon between $2.22 and $2.27 compared with $1.91 in the year ago period.

Additionally lower-than-expected improvements in the domestic market might affect total revenue per available seat mile (TRASM: a key measure of unit revenues) growth in the quarter to be reported. This key metric is anticipated to inch up approximately 1.5% in the quarter, lower than the previous increase of 1.5-3.5%. This sluggish growth might in turn lower top line growth.

Further, adjusted pre-tax margin for the quarter under review is projected in the 4.5-6.5% range, falling below 7% achieved in the fourth quarter of 2017.

However, the adverse impacts are anticipated to be partly offset by high passenger revenues owing to solid travel demand. The same is likely to further boost the top line.


Earnings Whispers

Our proven model does not conclusively show that American Airlines is likely to beat estimates this earnings season. This is because a stock needs to have both — a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. But that is not the case here as elaborated below.

Earnings ESP: American Airlines has an Earnings ESP of -2.56%, representing the difference between the Most Accurate Estimate and the Zacks Consensus Estimate. While the Most Accurate Estimate stands at $1 per share, the Zacks Consensus Estimate is pegged higher at $1.03. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: American Airlines currently carries a Zacks Rank #2, which increases the predictive power of ESP. However, a company requires a positive ESP as well to be confident about a likely earnings surprise. Hence, this combination leaves our surprise prediction inconclusive.

We caution that Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Investors interested in the broader Transportation sector may consider ArcBest Corporation (ARCB - Free Report) , Expeditors International of Washington, Inc. (EXPD - Free Report) and Allegiant Travel Company (ALGT - Free Report) as these stocks possess the right combination of elements to beat on earnings in the next releases.

ArcBest has an Earnings ESP of +4.78% and a Zacks Rank of 2.  The company will report fourth-quarter financial figures on Jan 30.

Expeditors has an Earnings ESP of +0.39% and a Zacks Rank of 1. The company will announce fourth-quarter results on Feb 19. You can see the complete list of today’s Zacks #1 Rank stocks here.

Allegiant has an Earnings ESP of +2.14% and is a Zacks #2 Ranked stock. The company is scheduled to release fourth-quarter earnings numbers on Jan 30.

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