What Will Drive American’s Near Term Growth?

On paper, American Airlines (NASDAQ:AAL) has managed a pretty good 2018 thus far, easily surpassing the earnings and revenue consensus estimates, while recording positive year over year growths. Despite this, the share price has fallen considerably over the year as higher fuel expenses forced the airline to trim its profit expectations twice consecutively. In general, this is the worst margin performance at the world’s largest carrier since its 2013 merger with US Airways. Going forward, we expect to see a similar lull carry into 2019 as well.

We have created an interactive dashboard What Is The Outlook For AAL on the company’s expected performance in 2019. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues and earnings.

As mentioned above, American is facing its worst earnings  since 2013. Higher fuel prices, coupled with slowing momentum in unit revenues, has taken a massive toll on profitability. Despite replacing a number of its gas guzzling, older planes with more fuel efficient jets over the last few years, fuel spending at American still increased at an unprecedented level.

In the most recent quarter, fuel prices jumped by a massive 37% from $1.63 per gallon in the same period last year to $2.24 per gallon. Due to this, despite benefiting from a lower tax rate and a near 6% reduction in share count year over year, adjusted EPS still plunged by 20% to $1.63.

Another troubling fact is that, over the past couple of quarters, American has consistently recorded a slowdown in its domestic revenue growth. In fact, passenger revenue per available seat mile (PRASM) inched up just 0.3% in the domestic market last quarter. A large portion of this unit revenue pressure can be attributed to the company’s commitment to maintain market share by raising its capacity over the industry average.

That said, American Airlines and United Airlines have competing hubs in a number of key markets. Due to this, United’s recent resurgence has likely come at the expense of American, more than any other carrier. This comes as bad news for the carrier, given that United Airlines plans to continue expanding rapidly in the domestic market for at least two more years.

All in all, it seems as though American has a very hard path to tread in front of them. While increased demand for air travel will benefit the top line, contracting margins and unit revenues are bound the hurt financials in the near term. We hope to gain more clarity on the situation over the next couple of months.