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How is American Airlines (AAL) Likely to Fare in Q3 Earnings?

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American Airlines (AAL - Free Report) is scheduled to report third-quarter 2020 results on Oct 22, before the market opens.

The company has a dull earnings record. Its bottom line outpaced the Zacks Consensus Estimate in only one of the last four quarters (matching estimates in one of the remaining three and missing the same in the other two quarters). The average miss is 8.9%.

For the to-be-reported quarter as well, estimate revision for the bottom line does not indicate a rosy picture. Notably, the Zacks Consensus Estimate for the third-quarter bottom line has widened to a loss of $5.62 per share from $3.89 loss 90 days ago.

Against this backdrop, let’s delve deeper into the factors that might have impacted American Airlines’ performance in the September quarter.

Similar to the second quarter, American Airlines’ third-quarter performance is likely to have been dented by the coronavirus-induced weak passenger revenues as air-travel demand remains tepid. The spike in the coronavirus cases in some parts of the United States during the three-month period under consideration (July-September) is likely to have affected the already bleak air-travel demand, thereby hurting passenger revenues further.

Suggestive of the prevalent gloomy scenario, the Zacks Consensus Estimate for passenger revenues indicates a 79.1% plunge from the number reported in the year-ago quarter. To mitigate the extreme demand depression, the carrier is trimming its capacity. The Zacks Consensus Estimate for consolidated available seat miles (a measure of capacity) implies a 59.6% slump from the number reported in the year-earlier quarter. However, the Zacks Consensus Estimate for traffic (measured in revenue passenger miles) suggests a 76.2% decline from the prior-year quarter’s reported figure.

With traffic decreasing at a faster rate than capacity cutbacks, consolidated load factor (% of seats filled by passengers) is likely to have taken a beating in the third quarter. Notably, the Zacks Consensus Estimate for American Airlines’ third-quarter 2020 consolidated passenger load factor stands at a dismal 52%, hinting at a decline from 86% reported in third-quarter 2019.

Also, the Zacks Consensus Estimate for third-quarter passenger revenues per available seat miles (PRASM: a key measure of unit revenues) is pegged at 7.64 cents, implying a 47.3% reduction from the figure reported in the year-ago quarter.

Moreover, due to the capacity cuts, consolidated operating costs per available seat mile excluding fuel and special items or non-fuel unit costs are likely to have escalated in the to-be-reported quarter. Evidently, the Zacks Consensus Estimate for third-quarter non-fuel unit costs (consolidated) is pegged at 18.7 cents, implying a 27.7% increase from the figure reported in the year-ago quarter.

However, fuel prices are still below the year-ago levels despite the recent uptrend.  Against this backdrop, decreased fuel prices might reflect on American Airlines’ bottom line. Notably, the Zacks Consensus Estimate for average fuel price per gallon (adjusted) suggests a 39.5% drop from the figure reported in the September quarter of 2019. Moreover, with a significant portion of the fleet remaining grounded or under-utilized due to the coronavirus-led bleak demand scenario, the carrier’s fuel gallon consumption is likely to have been moderate in the September quarter, thereby reducing its fuel expenditure. This, in turn, might have boosted the airline’s bottom-line performance. Notably, the Zacks Consensus Estimate for fuel gallons consumed (on a consolidated basis) indicates a 56.9% reduction from the figure reported in the year-ago quarter.

What Does the Zacks Model Unveil?

The proven Zacks model does not predict a bottom-line beat for American Airlines this time around. Notably, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a positive earnings surprise. However, this is not the case as elaborated below. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings ESP: American Airlines has an Earnings ESP of -1.11%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: American Airlines carries a Zacks Rank #3 (Hold), currently.

Highlights of Q2

In the last reported quarter, the company incurred a loss (excluding $3 from non-recurring items) of $7.82 per share, comparing unfavorably with the Zacks Consensus Estimate of a loss of $6.75. However, the company delivered earnings per share of $1.82 in the year-ago quarter. Operating revenues of $1,622 million slumped 86.4% year over year but surpassed the Zacks Consensus Estimate of $1,481.1 million.

Stocks to Consider

Investors interested in the broader Transportation sector may consider Knight-Swift Transportation Holdings (KNX - Free Report) , United Parcel Service (UPS - Free Report) and C.H. Robinson Worldwide (CHRW - Free Report) as these stocks possess the right combination of elements to beat on earnings this reporting cycle.

Knight-Swift has an Earnings ESP of +6.79% and is Zacks #2 Ranked, presently. The company will release third-quarter 2020 results on Oct 21.

UPS has an Earnings ESP of +5.40% and a Zacks Rank #2 at present. The company will release third-quarter 2020 results on Oct 28.

C.H. Robinson has an Earnings ESP of +1.35% and is currently a #2 Ranked player. The company will release third-quarter 2020 results on Oct 27.

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