Shares of American Airlines Group (AAL - Free Report) slipped to a 52-week low of $29.67 during the trading session on Dec 24 before retracing a bit to close at $29.72. The stock has lost 43.3% in a year’s time compared with the industry’s 28.6% decline.
Reasons Behind the Stock’s Decline
American Airlines has struggled with low bottom-line growth for the most part of 2018, thanks to rising fuel prices. This is because fuel comprises a major chunk of the airline expenditure. Evidently, the company’s bottom line declined significantly during the first nine months of 2018. In fact, the airline seems to have little respite even now that oil prices are down trending. The carrier’s projection for fuel costs in the final quarter of 2018 remains unchanged at $2.30-$2.35 compared with $1.90 in the year-ago period.
We remind investors that fellow players in the industry such as Southwest Airlines (LUV - Free Report) , Spirit Airlines (SAVE - Free Report) and Alaska Air Group (ALK - Free Report) have lowered their fuel cost forecast following the slump in oil prices this November. However, American Airlines is perhaps still skeptical and yet to make a move.
Apart from fuel prices, high labor costs are also weighing on the company’s earnings. With airline employees agitating over low pay scales, labor deals are very much in vogue in the industry. In this regard, pilots at American Airlines are planning to amend the existing contract (inked in 2015) before it becomes due for renewal in early 2020. To this end, the union (Allied Pilots Association) representing American Airlines’ 15,000 pilots has asked the company to commence negotiations in January 2019 for a fresh contract including an improved pay structure. (Read more: American Airlines Pilots Aim for New Contract Talks in 2019)
The contract on materialization will certainly be a big boon to the airline staff. However, additional costs from it might affect the company’s earnings.
Passenger Traffic Strong Amid Cost Woes
We expect strong demand for air travel to support this Zacks Rank #2 (Buy) company’s growth despite the carrier struggling with rising costs. As a result of robust demand, passenger revenues, accounting for bulk of the top line, increased 4.3% in the first nine months of 2018. Moreover, total revenue per available seat miles (TRASM: a key measure of unit revenues) is anticipated to increase in the 1.5-3.5% band during the final quarter of 2018. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Buoyed by this tailwind among other factors, the Zacks Consensus Estimate for current-quarter earnings has been revised 13.7% upward in the last 60 days. Also, the same for 2018 earnings has moved 2.2% north.
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