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American Airlines Group Gains on Bullish Q4 RASM View

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Shares of Fort Worth, TX-based American Airlines Group (AAL - Free Report) gained on Nov 9, following the company’s announcement of bullish fourth-quarter view for total revenue per available seat mile (TRASM: a key measure of unit revenues). The stock closed the last trading session at $42.41, up 1.7% from the previous day’s closing price, following the guidance which was issued by the carrier while releasing its October traffic data.

Traffic measured in revenue passenger miles (RPMs) declined 2.6% on a year-over-year basis to 18.4 billion. The downside was primarily attributable to lackluster performances in the Atlantic and Latin American markets.

Consolidated capacity (available seat miles/ASMs) inched up 0.3% to 22.3 billion in the month. However, load factor or the percentage of seats filled by passengers decreased 260 basis points (bps) to 82.6% in Oct 2016. This was primarily because capacity expanded while traffic contracted, leading to empty planes.

In the first ten months of 2016, American Airlines recorded 0.3% growth in RPMs to 188. 5 billion, while ASMs climbed 2% to 230.1 billion, both on a year-over-year basis. Also, load factor declined 140 bps to 81.9%. Moreover, total passenger count (Enplanements) slipped 0.6% for the same period.

The carrier now expects TRASM to decline in the band of 0.5% to 2.5% in the fourth quarter. The view represents a marked improvement from the guidance issued last month when it expected the metric to decline in the band of 1% to 3%.

We note that unit revenue issues have been hurting carriers for quite some time. However, carriers have been working hard in order to return to positive unit growth after months of decline. Delta Air Lines (DAL - Free Report) expects to return to positive unit revenue growth by early next year. United Continental Holdings (UAL - Free Report) , on the other hand, expects passenger revenue per available seat miles (PRASM) to decline in the band of 4–6% in the fourth quarter as against the third-quarter PRASM decrease of 5.8%.

American Airlines not only provided an improved view for TRASM but the guidance for pre-tax margin excluding special items has also been raised on the basis of higher yields and the recent fall in oil prices. Pre-tax margin for the fourth quarter is now expected in the band of 5–7%  compared with the prior guidance 4–6%.

Zacks Rank & A Key Pick

Currently, American Airlines has a Zacks Rank #3 (Hold). A better-ranked transportation stock is Copa Holdings (CPA - Free Report) , which sports a Zacks Rank #1 (Strong Buy). The 2016 Zacks Consensus Estimate has increased 12 cents to $4.67 over the last month for Copa Holdings.  You can see the complete list of today’s Zacks #1 Rank stocks here.  

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