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American Airlines Stock Up on Bullish Q2 Unit Revenue View

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Shares of American Airlines Group (AAL - Free Report) gained 1.8% on Jul 10 to close the trading session at $32.94. The uptick can be attributed to the bullish unit revenue projection for second-quarter 2019. Notably, the company issued this improved view despite flight cancellations following the grounding of the 737 MAX jets.

As a result of American Airlines’ favorable unit revenue projection, the share price of other key sector participants like Delta Air Lines (DAL - Free Report) and United Airlines (UAL - Free Report) also moved northward.  

American Airlines’ Revised Guidance

American Airlines stated in an investor update that it was impelled to cancel 7,800 flights in the second quarter (the April-June period) as the 737 MAX jets in its fleet were non-operational. Following the flight cancellations, American Airlines anticipates its second-quarter pre-tax income to be hurt to the tune of roughly $185 million. The impact of the groundings on full-year pre-tax income would be revealed by the company on the second-quarter conference call. Meanwhile, American Airlines, with 24 Boeing 737 MAX jets in its fleet, has stated that the jets would remain grounded till Sep 3.

Additionally, this Zacks Rank #4 (Sell) carrier now expects second-quarter total revenue per available seat mile (TRASM: a key measure of unit revenues) year-over-year growth in the 3-4% range compared with the 1-3% range predicted earlier. This Fort Worth, TX-based carrier attributed its decision to increase the TRASM projection to higher-than-expected load factor (% of seats filled by passengers) across the system. Notably, TRASM is a measure of sales relative to capacity for a carrier

Increase in load factor (calculated by revenue passenger miles divided by available seat miles) implies enhanced profitability as the fixed costs are spread across more passengers. American Airlines now anticipates second-quarter available seat miles (a measure of capacity) to be approximately 72.3 billion (1.1 billion lower than previous projection) due to the flight cancellations following the Boeing 737 MAX groundings. Lower capacity is also a favorable development for unit revenues.

However, the company expects soft cargo revenues due to sluggish demand in the Asian and European markets. Guidance with respect to pre-tax margin (excluding special items) is, however, favorable. The metric is anticipated to be approximately 8.5-9.5% (earlier view: 7-9%) in the to-be-reported quarter.

Another bright aspect of American Airlines’ guidance was with respect to non-fuel unit costs. Despite the numerous flight cancellations, the projection for non-fuel unit costs has not been increased drastically. This reflects the company’s prudent cost management. For the second quarter, it expects unit costs (excluding fuel and special items) to increase between 4.5% and 5.5% (earlier view: 3.5-5.5% band). The guidance is favorable compared to the steep hike projected by Southwest Airlines (LUV - Free Report) . The Dallas-based carrier expects second-quarter non-fuel unit costs to increase in the 11.5-12.5% range.

Additionally, American Airlines expects fuel costs per gallon between $2.12 and $2.17. The carrier had reported fuel costs per gallon of $2.24 in the second quarter of 2018.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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