Expect A Muted 3Q From American Airlines

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AAL: American Airlines logo
AAL
American Airlines

American Airlines (NYSE: AAL) is expected to report earnings on the 25th October. American Airlines’  stock has lagged its peers through the first half of the year, falling by 38% year-to-date. Investors pulled out of the stock during the first half, with earnings being sluggish. We expect the 3Q to be not much better, and results are expected to come in weaker y-o-y. Earnings per share is expected to come in at  $1.10; which is a 21% decline y-o-y. While revenues are expected to rise by 5% to $11.3 billion.

We currently have a price estimate of $39 per share, which is 20% higher than the market price. You can use our interactive dashboard Q3 Outlook For American Airlines to modify key drivers and visualize the impact on American Airlines’ price estimate.

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American Airlines faces several structural issues: high leverage, high fixed costs, and overcapacity. We have little faith the management has taken the necessary steps to address these issues.  American Airlines through the first half, had $24 billion in debt and capital leases. In addition to the previously mentioned issues, we should not expect the type of fuel-recapture achieved by some of American Airlines’ peers. American Airlines also faces $5.6 billion in capital expenditure over the next couple of quarters.  This will weigh down the earnings moving forward.

On the other hand, American Airlines has done well to increase its RASM (revenue per average seat mile). RASM is expected to be 3% higher y-o-y as the company pared back adding capacity during the quarter. Furthermore, the carrier is expected to increase ticket prices moderately during the quarter. This should help shore up margins.

All in all, little improvement is expected  during the latest quarter from American Airlines, and as a result, we expect earnings to fall. Unless the carrier takes significant steps in the coming quarters, margins will continue to show weakness, dragging the stock down further.

 

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