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Is a Beat Likely for American Airlines (AAL) in Q2 Earnings?

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We expect American Airlines Group (AAL - Free Report) to surpass expectations in terms of earnings per share when it reports second-quarter 2019 results on Jul 25, before the opening bell. The Zacks Consensus Estimate is $1.77 for second-quarter earnings and $11.96 billion for revenues.

In the last reported quarter, the company delivered better-than-expected earnings per share. However, the bottom line decreased on a year-over-year basis due to high costs. Backed by impressive passenger revenues, American Airlines’ top line increased year over year.

Furthermore, American Airlines has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters, as the chart below shows.

Let’s delve deeper and find out the factors likely to impact American Airlines’ results in the to-be-reported quarter.

We expect American Airlines’ second-quarter results to be negatively impacted by the grounding of Boeing’s 737 MAX flights. Notably, this Fort Worth, TX-based carrier anticipates its pre-tax income to be hurt to the tune of roughly $185 million due to cancellation of 7,800 Boeing 737 MAX flights. Currently, American Airlines has 24 such jets in its fleet. 

With fuel costs moderating, increase in non-fuel unit costs is expected to weigh on the company’s bottom-line performance in the quarter to be reported. American Airlines expects non-fuel unit costs to increase 4.5-5.5%. Additionally, the carrier anticipates fuel costs per gallon between $2.12 and $2.17.  For second-quarter fuel costs per gallon, the Zacks Consensus Estimate is pegged at $2.17, below $2.24 registered a year ago.

The 737 MAX groundings have also led to a lower capacity forecast. American Airlines anticipates second-quarter available seat miles (a measure of capacity) to be approximately 72.3 billion (1.1 billion lower than previous projection).

However, the company is anticipated to perform well on the unit revenue front. The carrier 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. Buoyant load factor (calculated by revenue passenger miles divided by available seat miles) across the system is anticipated to boost TRASM, a measure of sales relative to capacity for a carrier.

Increase in load factor (% of seats filled by passengers) implies enhanced profitability as the fixed costs are spread across more passengers. The Zacks Consensus Estimate for load factor (mainline and regional) is pegged at 84, which is 6.3% higher than what was reported a year ago.

We also expect American Airlines to report an uptick in passenger revenues in the to-be-reported quarter on the back of strong demand for air travel. Solid demand apart, favorable pricing is expected to result in increased revenues. Reportedly, American Airlines raised domestic fares $5 each way in June. 

What the Zacks Model Unveils

Our proven model shows that American Airlines is likely to beat estimates in the second quarter. This is because a stock needs to have both — a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if they have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: American Airlines has an Earnings ESP of +0.85% as the Zacks Consensus Estimate of $1.77 is a penny lower than the Most Accurate Estimate.

Zacks Rank: American Airlines carries a Zacks Rank #3, which further increases the predictive power of Earnings ESP.

Other Stocks to Consider

Investors interested in the broader Transportation sector may consider JetBlue Airways (JBLU - Free Report) , Canadian National Railway Company (CNI - Free Report) and Ryder System (R - Free Report) as these stocks too possess the right mix of elements to beat on earnings in the next releases.

JetBlue Airways has an Earnings ESP of +2.20% and a Zacks Rank #2. This company is scheduled to announce second-quarter 2019 numbers on Jul 23. You can see the complete list of today’s Zacks #1 Rank stocks here.

Canadian National is a Zacks #3 Ranked company and has an Earnings ESP of +0.25%. The company will release second-quarter 2019 results on Jul 23.

Ryder has an Earnings ESP of +0.07% and a Zacks Rank #3. This company is scheduled to announce second-quarter 2019 numbers on Jul 30.

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