Airlines Sink as American, Southwest Cast Pall on Sentiment

(Bloomberg) -- U.S. carriers sank after American Airlines Group Inc. trimmed its profit forecast and Southwest Airlines Co. said ticket sales had slowed after its first passenger fatality.

A jump in fuel prices over the last two weeks prompted American to cut its expected earnings for the year because “it takes time to adapt,” Chief Executive Officer Doug Parker said Thursday. Southwest predicted weaker pricing power this quarter, citing a drop in bookings after last week’s deadly accident.

The sober outlooks cast a pall on airlines, whose shares have slipped this year as investors feared that an expansion plan by United Continental Holdings Inc. would spark fare wars and drag down profits. American’s report underscored the threat of rising costs. Jet fuel has climbed 21 percent since hitting its 2018 low on Feb. 13, as benchmark oil prices have advanced.

Airlines Sink as American, Southwest Cast Pall on Sentiment

“Pricing is weak but fuel costs are rising,” Logan Purk, an analyst at Edward Jones, said in an interview. “You can’t really offset those costs in this pricing environment.”

American tumbled 5.8 percent to $42.64 at 3:17 p.m. in New York after sinking as much as 10 percent for the biggest intraday decline since June 2016. The carrier fell the most on a Standard & Poor’s index of major U.S. carriers, which dropped 2.7 percent. Southwest fell 1.6 percent after declining as much as 5.3 percent.

American’s adjusted earnings will be $5 to $6 a share this year because of the drag from fuel, the carrier said in an earnings release. That was 50 cents lower than the previous forecast.

‘Near-Term Problem’

“Fuel prices have risen very quickly,” Parker said on a conference call with analysts. “I view that as a near-term problem. It’s one the industry can handle over time, but it doesn’t happen immediately.”

If fuel prices remain at current levels or increase more, fares will probably trend up over time, Parker said. Fort Worth, Texas-based American estimated that it would pay $2 billion more for fuel this year from the higher prices alone.

The airline’s first-quarter adjusted earnings fell to 75 cents a share. Analysts had expected 72 cents, according to the average of estimates compiled by Bloomberg. Revenue climbed 5.9 percent to $10.4 billion, in line with Wall Street expectations.

Southwest Accident

At Southwest, first-quarter profit climbed to 75 cents a share, a penny more than analysts anticipated. Revenue increased 1.9 percent to $4.9 billion, while analysts expected $5 billion. A reduction in its federal income tax rate “significantly” increased first-quarter net income, Southwest said.

Revenue for each seat flown a mile, a proxy for pricing power, will drop as much as 3 percent this quarter, Southwest said. The Dallas-based carrier blamed as much as two percentage points of the decline on weak sales, after an accident in which an engine exploded in flight on April 17, piercing the plane and killing a passenger. Southwest set the value of the lost bookings at $50 million to $100 million.

Other airlines expect gains in the pricing-power gauge. Delta Air Lines Inc. predicted an increase of as much as 5 percent. American said its gain would be as high as 3.5 percent.

©2018 Bloomberg L.P.