American Air Sinks Most in Two Years on Surprise Fare Weakness

(Bloomberg) -- American Airlines Group Inc. tumbled the most in two years after lower-than-expected U.S. fares dented a closely watched measure of pricing power.

Revenue for each seat flown a mile probably only rose 1 percent to 3 percent in the second quarter, the world’s largest carrier said Wednesday in an investor update, cutting its earlier forecast by half a percentage point on both ends. The measurement is widely used as an indicator of a carrier’s ability to raise fares. The airline declined to comment on what drove ticket prices lower.

Fare weakness is adding to the pressure on U.S. airlines, which already are contending with a more than 50 percent jump in fuel prices over the last year. While summer travel demand is strong, American Chief Executive Officer Doug Parker has warned of the need for higher fares because of rising fuel costs. There is typically a six- to 12-month lag before carriers can raise ticket prices enough to compensate for the extra spending.

“Increasing costs and competitive pressures have stifled American’s earnings potential,” Helane Becker, a Cowen & Co. analyst, said in a report. “In a rising jet-fuel environment, airlines should be raising prices, and investors expect yields to show improvement to offset higher labor and fuel costs.”

Becker and JPMorgan Chase & Co.’s Jamie Baker expect that American will announce a reduction in planned growth for the year, probably when it reports second-quarter earnings late this month.

American fell 8.1 percent to $35.96 at the close in New York, the sharpest drop in the S&P 500 index. The decline dragged down other carriers as well, with an S&P index of airlines falling 2.9 percent.

Capacity Plans

The Fort Worth, Texas-based carrier didn’t sketch out changes to its 2018 growth plans. Slowing or cutting expansion in the number of seats and flights typically allows airlines to boost ticket prices as long as demand remains strong. American has said it plans to increase capacity 2.5 percent this year.

American and Delta Air Lines Inc. each have said their 2018 fuel bills will increase by at least $2 billion, and American in April trimmed its 2018 profit outlook by 50 cents a share as a result. On Wednesday it said second-quarter average fuel prices were $2.24 to $2.29 a gallon, up from a previous forecast of not more than $2.23.

Delta is likely to reduce its 2018 earnings and capacity guidance when it reports second-quarter financial results Thursday, Baker said in a note Tuesday.

American’s costs on a seat-mile basis rose about 2.5 percent in the second quarter, less than the 3.5 percent increase originally expected, as maintenance expenses decreased and the carrier booked credits for airport rent settlements.

©2018 Bloomberg L.P.