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Will High Fuel Costs Mar American Airlines' (AAL) Q3 Earnings?

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American Airlines Group Inc. (AAL - Free Report) is scheduled to report its third-quarter 2018 earnings numbers on Oct 25, before the market opens.

In the last reported quarter, the company delivered a positive earnings surprise of 2.5%. However, the bottom line contracted on a year-over-year basis due to high fuel costs.

Notably, this Fort Worth, TX-based carrier is likely to face turbulence in the third quarter as well due to high fuel costs. Hurricane Florence is also anticipated to hurt earnings in the to-be-reported quarter.

The negative sentiment surrounding the stock can be gauged from the fact that the Zacks Consensus Estimate for third-quarter earnings moved south 5.1% over the last 60 days.

Mainly due to rise in fuel costs, American Airlines has struggled so far this year performing worse than its  industry. The stock has lost 38.4% compared with its industry’s 21.1% decline.

Year-to-Date Price Performance

 

Let’s delve deep to find out the factors likely to impact American Airlines’third-quarter results.

High fuel costs are expected to limit bottom-line growth in the third quarter of 2018, as has been the case over the past few quarters. At an Investor Update, on Oct 9, the company raised its third-quarter guidance for fuel costs. Currently, fuel cost per gallon is anticipated between $2.28 and $2.33 (the previous view had projected the metric in the $2.22-$2.27 band).

American Airlines expects Hurricane Florence to hurt its third-quarter revenues and pre-tax income by approximately $55 million and $50 million, respectively. The weather disruption is also anticipated to weigh on its third-quarter unit revenues to the tune of roughly 50 basis points. In September, the carrier had to cancel roughly 2,100 flights due to the natural calamity.

Apart from American Airlines, third-quarter results of other carriers like Southwest Airlines Co. (LUV - Free Report) and JetBlue Airways Corporation (JBLU - Free Report) are likely to be hurt by the natural calamity and high fuel costs.

However, strong demand for air travel is expected to boost American Airlines’ top line in the soon-to-be-reported quarter. The carrier expects total revenue per available seat miles (TRASM: a key measure of unit revenue) to increase in the range of 2-3% year over year. Pre-tax margin is expected between 5% and 7%.

What Does Our Model Say?

Our proven model too does not show conclusively that American Airlines will beat earnings in third-quarter 2018. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. However, that is not the case as highlighted below.

Earnings ESP: American Airlines has an Earnings ESP of 0.00% as both the Most Accurate Estimate is in line with the Zacks Consensus Estimate of $1.12 per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: American Airlines’ Zacks Rank #5 (Strong Sell) acts as a spoiler.

Note that we caution against stocks with a Zacks Ranks #4 (Sell) or 5 going into an earnings announcement, especially when the company is seeing a negative estimate revision.

A Transportation Gem

With American Airlines likely to disappoint, investors interested in the broader Transportation sector may consider Union Pacific Corporation (UNP - Free Report) as our model shows that this company possesses the right combination of elements to post an earnings beat in its upcoming release.

Union Pacific has an Earnings ESP of +0.57% and a Zacks Rank #2. The company will report third-quarter results on Oct 25. You can see the complete list of today’s Zacks #1 Rank stocks here.

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