What Can We Expect From American Airlines’ Q1 Earnings?

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American Airlines (NASDAQ:AAL) is all set to report earnings for the first quarter of FY 2017 on April 27. In the previous quarter, the company reported better-than-expected financial figures, beating the consensus estimates for revenues and earnings comfortably. Despite this, its stock price declined notably. The descent in the stock price is likely due to the decline in earnings per share in Q4 2016 due to the increasing labor costs for the airline. That said, the company became the first major airline in Q4 2016, after a spell of almost two years, to turnaround its unit revenues to positive.

The company expects non-fuel costs to increase by as much as 8%-10% in the first quarter of the year 2017, as the full impact of the labor agreement is realized. This, together with increasing oil prices, will lower the company’s pre-tax margins consequently. However, through the course of the year 2017, the non -fuel costs are expected to normalize, up only 4%. The company will keep restricting its capacity in order to grow unit revenues. While the system wide capacity is expected to be down 2% in Q1 2017, it is expected to rise 1% for the full year 2017.

Probable Highlights:

  • As mentioned previously, the company will restrict capacity to increase unit revenues. In this respect, the company recently announced a bullish guidance for its first quarter total revenue per available seat mile (TRASM). It now expects to grow the metric in the range of 2-4% year-over-year in Q1. This represents a marked improvement from the guidance issued last month, when it expected the metric to grow by around 1.5-3.5%. Additionally, it now expects pre-tax margin (excluding special items) to be in the range of 4-6%, up from the original 3-5%.
  • That said, the recently inked labor deals are expected to continue to hamper bottom line growth in the quarter. As mentioned previously, the company expects the costs per available seat mile (CASM) to increase in the range of 8-10% in Q1.
  • Oil prices in the quarter proved to be highly volatile. Earlier in the year, members of the Organization of Petroleum Exporting Countries (OPEC) imposed severe production cuts. This led to a sudden surge in oil prices. In the first two months of the year, oil prices traded between $50-$55 per barrel. However, in March, the price fell to below $50 per barrel again, as the U.S. inventory and production compensated for the decline in OPEC oil supply. The volatility in the oil prices is likely to impact the airline’s fuel expenditure significantly. The projected fuel cost is expected to lie anywhere between $1.67 to $1.72 per gallon.
  • The company returned approximately $606 million back to its equity owners in the last quarter in the form of share buybacks ($554 million) and dividend payments, providing value to the shareholders. Additionally, the carrier also approved a new $2 billion buyback program, which is scheduled to expire on December 31, 2018. We can expect the management to shed more light on this in the upcoming earnings call.
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