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Will Cost Woes Dampen American Airlines' (AAL) Q4 Earnings?

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American Airlines Group (AAL - Free Report) is scheduled to report fourth-quarter 2021 results on Jan 20, before market open.

The Zacks Consensus Estimate for fourth-quarter loss has widened by 3.5% in the past 60 days. Given this, let’s take a look at the factors that are expected to have influenced the company’s fourth-quarter performance:

With improved air-travel demand, American Airlines’ passenger revenues are expected to reflect sequential increase in the fourth quarter. The Zacks Consensus Estimate for fourth-quarter passenger revenues indicates a 1.1% rise from the third-quarter reported number. Robust Thanksgiving holiday demand is expected to have boosted the carrier’s passenger revenues.

However, mass-scale flight cancellations between late October and early November, as well as during the Christmas travel period through the end of the year owing to staffing shortages and inclement weather conditions, pushed up American Airlines’ costs. The airline expects cost per available seat mile (“CASM”) to increase 13-14% in the fourth quarter from the 2019 level. Apart from reduced capacity, a holiday operational incentive program in the fourth quarter and a write down of excess spare-parts inventory pushed up the company’s unit costs. The higher expenses are likely to have hurt AAL’s bottom line in the to-be-reported quarter.

Rising fuel costs are also expected to have dented American Airlines’ bottom line in the fourth quarter. American Airlines estimates average fuel price per gallon to be $2.36 for the fourth quarter, indicating a rise of 14% from the third quarter’s reported figure. The Zacks Consensus Estimate for the same stands at $2.42.

Despite improving, air-travel demand continues to be below the pre-pandemic levels. As a result, American Airlines expects total revenues to decline approximately 17% in the fourth quarter of 2021 from the comparable period in 2019.

Earnings Whispers

The proven Zacks model does not conclusively predict an earnings beat for American Airlines this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. However, this is not the case here, 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 -0.34% as the Most Accurate Estimate is pegged at a loss of $1.79, while the Zacks Consensus Estimate is poised at a loss of $1.78. 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.

Highlights of Q3 Earnings

American Airlines incurred an adjusted loss of 99 cents per share in the third quarter of 2021, narrower than the Zacks Consensus Estimate of a loss of $1.04. This was the seventh consecutive quarterly loss incurred by the company as coronavirus continues to weigh on air-travel demand. Operating revenues of $8,969 million skyrocketed 182.67% year over year and also surpassed the Zacks Consensus Estimate of $8,926.6 million. The upside was due to significant increase in passenger revenues, thanks to improved air-travel demand.

Stocks to Consider

Investors interested in the broader Transportation sector may consider C.H. Robinson Worldwide (CHRW - Free Report) , Southwest Airlines (LUV - Free Report) and Landstar System (LSTR - Free Report) , as these stocks possess the right combination of elements to beat on earnings this reporting cycle.

C.H. Robinson currently has an Earnings ESP of +4.79% and a Zacks Rank #3. The company will report fourth-quarter 2021 results on Feb 2.

Favorable pricing and higher volumes, owing to improved freight market conditions, are expected to have aided C.H. Robinson’s fourth-quarter performance.

Southwest Airlines has an Earnings ESP of +227.38% and is currently a Zacks #3 Ranked player. The company will release fourth-quarter 2021 results on Jan 27.

Southwest Airlines expects to be profitable in the fourth quarter of 2021 owing to a strong Thanksgiving holiday travel period, higher fares and benefits from the co-brand credit card agreement with Chase.

Landstar System has an Earnings ESP of +3.19% and is Zacks #3 Ranked, presently. The company will release fourth-quarter 2021 results on Jan 26.

Landstar’s fourth-quarter performance is expected to have benefited from higher truck rates and strong freight demand.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.