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Will American Airlines' (AAL) Q4 Earnings be a Let Down?

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American Airlines AAL is slated to release fourth-quarter 2019 results on Jan 23, before market open.

The Zacks Consensus Estimate for fourth-quarter 2019 earnings has been revised downward 0.8% in the past 60 days. Given this backdrop, let’s delve into the factors that might have influenced the company’s performance in the quarter.

American Airlines currently has 24 Boeing 737 MAX jets in its fleet, which are grounded since March 2019. Multiple flight cancellations due to these groundings are likely to have dented the carrier’s performance in the final quarter of 2019. Notably, the grounding of the American Airlines’ 737 MAX fleet might have resulted in capacity reduction.The Zacks Consensus Estimate for fourth-quarter available seat miles (a measure of capacity) is pegged at 70.2 billion compared with the 75.8 billion reported in third-quarter 2019.

Bleak cargo revenues, mainly due to sluggish cargo ton miles as a result of lackluster international freight volumes, are also likely to have hurt the carrier’s performance in the October-December quarter. Moreover, higher completion factor and lower-than-expected yields during the pre-Thanksgiving period might have hurt the company’s unit revenues. American Airlines expects fourth-quarter total revenue per available seat mile (TRASM: a key measure of unit revenues) to have be flat or increase up to 1% from the year-ago figure compared with the earlier guidance of either flat or an increase up to 2%.

However, non-fuel unit costs are unlikely to have been much of a hindrance in the to-be-reported quarter due to improved operational performance and higher completion factor. In fact, this Fort Worth, TX-based carrier now estimates fourth-quarter costs per available seat miles (excluding fuel and special items) to have increased in the 1-3% band on a year-over-year basis (earlier outlook: increase in the 2-4% range). The Zacks Consensus Estimate for fourth-quarter costs per available seat miles (excluding fuel and special items) is pegged at 11.66 cents, lower than the 14.64 billion reported for the July-September period.

Moreover, reduction in fuel costs is likely to have supported American Airlines’ bottom-line performance in the quarter under review. In fact, the Zacks Consensus Estimate for fourth-quarter 2019 average fuel price per gallon (mainline) is currently pegged at $2.00, indicating a 10.3% decline from the year-earlier reported number.

American Airlines Group Inc. Price and EPS Surprise


American Airlines Group Inc. Price and EPS Surprise

American Airlines Group Inc. price-eps-surprise | American Airlines Group Inc. Quote

What Does the Zacks Model Say?

The proven Zacks model does not conclusively predict an earnings beat for American Airlines in the fourth quarter of 2019. 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 here as elaborated below. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings ESP: American Airlines has an Earnings ESP of -2.74% as the Most Accurate Estimate is pegged at $1.21, lower than the Zacks Consensus Estimate of $1.24. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: American Airlines carries a Zacks Rank #3, currently.

Highlights of Q3 Earnings

In the last reported quarter, American Airlines’ earnings (excluding 46 cents from non-recurring items) of $1.42 per share surpassed the Zacks Consensus Estimate by 4 cents. In addition, the bottom line improved 25.7% on a year-over-year basis, driven by low fuel costs. Meanwhile, revenues came in at $11,911 million, falling short of the Zacks Consensus Estimate of $11,940.9 million. The top line, nevertheless, improved 3% on a year-over-year basis.

Stocks to Consider

Investors interested in the broader Transportation sector may consider Azul S.A. AZUL, Kansas City Southern KSU and Canadian Pacific Railway Limited (CP - Free Report) as these stocks possess the right combination of elements to come up with earnings beats in their next releases.

Azul has an Earnings ESP of +13.33% and currently sports a Zacks Rank of 1. The company will release fourth-quarter earnings numbers on Mar 12.

Kansas City Southern is a Zacks #3 Ranked stock and has an Earnings ESP of +0.37%. The company is slated to report fourth-quarter figures on Jan 17.

Canadian Pacific has an Earnings ESP of +0.03% and carries a Zacks Rank of 3, at present. The company will release quarterly numbers on Jan 29.

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